Thinking of buying a condo in 2020? Don't overlook this 1 key expense
Finance columnist Mark Ting on the importance of insurance for condo buyers
Last week I received an email from Eric, a first-time homebuyer who was wondering whether he should buy a condo now or wait until the traditionally busier spring real estate season.
He is looking to buy a one-bedroom apartment in Vancouver for less than $500,000. He has $120,000 for a down payment and is pre-approved for a $390,000 mortgage.
But just because a lender pre-approved Eric for a $390,000 mortgage doesn't mean he can afford it.
When determining a budget, I work backwards. I use a spreadsheet to calculate all my expenses (housing and otherwise), include a buffer — as I know certain costs will rise faster than my income — and then let the spreadsheet tell me know much I can afford.
When Eric used my spreadsheet, it validated his housing budget of $500,000 so I told him to start house hunting. As he is a serious buyer, there's no harm in looking at what is currently available but, at the same time, he shouldn't feel pressured to rush out and buy.
Unfortunately for him, one-bedroom condos are in high demand. It is a seller's market and there isn't much inventory. This could change in the spring as prices are trending higher and these higher price points should entice more sellers to list their properties.
Whether Eric should buy now or wait depends on what he finds. If he finds a condo he likes, and the spreadsheet confirms he can afford it, he should make an aggressive offer.
Pay attention to premiums — and deductibles
An area that condo buyers need to pay close attention to is the building's strata insurance.
For most strata buildings, insurance premiums and deductibles have jumped significantly over the past year. Many strata councils have had to increase strata fees by 20 to 30 per cent to offset the hike in premiums.
Condo homeowner insurance, which is a separate insurance used to cover your personal property or to pay for the strata's deductible, is also going up.
Homeowner insurance would kick in, for example, if your bathtub overflowed and the water damaged the 10 units below you. If this were to happen and the condo owner didn't have extra insurance, he/she would have to pay the strata's deductible personally.
There is a building in Yaletown that has a deductible of $600,000. If a bathtub overflowed in this building and caused $550,000 worth of damage, the strata wouldn't make an insurance claim to fix the damage. They would instead expect the condo owner to foot the $550,000 bill. While a $600,000 deductible is extreme, the new normal for condo towers is a deductible between $80 and $130,000.
My strata unit's deductible went from $5,000 to $25,000, but I consider myself lucky. I own a townhouse where no one lives above or below me so if my bathtub overflows, it only affects my unit.
Premiums are risk-based, which is why my strata's insurance premium increases weren't nearly as severe as those of a 50-floor downtown apartment building.
Insist on seeing strata's insurance certificate
More than ever, buyers need to consider the insurance premiums and deductibles when choosing their new home.
Most buyers know it's wise to complete a building inspection and read the strata council minutes when performing due diligence. However, before moving forward with a purchase, I would also insist on seeing the strata insurance certificate, check the renewal date and speak to an insurance broker about qualifying for adequate condo insurance.
When Eric was going through his affordability spreadsheet, I recommended that he increase his strata allotment by 50 per cent and double his allotment for homeowner insurance.
I also suggested that if there were two buildings that he liked, and one had a significantly higher deductible attached to it, I would favour the building with the lower deductible, even if it was slightly more expensive.
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