Can You Afford a Condo with High Fees? [Guest Post]
Some first-time homebuyers think the mortgage payment is the only expense they have to pay for regularly but that’s not all. There are also other costs, like property taxes, home insurance, and condo fees.
The fees can vary depending on the age of the building and what they cover. Condo fees (also called strata fees) are often used for three main things:
- Utilities—A condo corporation can pay some or all of your utility costs. For instance, your electricity and water costs will be covered but your heating costs will not.
- Building maintenance—Your fees will be used to pay for trash pickup, snow removal, and the cleaning and repair of common areas of the condo.
- The reserve fund—A condo corporation is required to have a reserve fund, which is used to cover unexpected repairs, such as a new roof.
In Toronto, the average fee for a condo is about $0.50 a square foot but can cost as much as $1.00 a square foot. That means the fees on a 700-square foot condo will cost between $350 and $700 a month.
If you’re looking at purchasing a property with high condo fees, it could affect your ability to save for retirement so you should determine whether or not it’s affordable.
Can you afford it?
If you’re looking at whether you can afford to buy a condo with higher-than-average condo fees, you should look at gross debt service (GDS) ratio, which should be less than 32%.
Your GDS ratio is calculated using the following formula:
Mortgage payments + Property taxes + Heating costs + 50% of condo fees ÷ Annual income
We’ll look at two examples of a 700-square-foot condo costing $375,000. The first one has condo fees of $0.50 a share foot. We’ll assume you earn $82,000 annually and will purchase the property with a 5% down payment and have a five-year fixed mortgage with a rate of 2.34%.
Using RateHub’s mortgage calculator, we’ve determined your costs will be:
| Costs | Monthly | Yearly |
| Mortgage | $1,624 | $19,488 |
| Property tax | $215 | $2,580 |
| Utilities | $50 | $600 |
| Condo fees | $291.67 | $3,500 |
| Total cost | $2,180.67 | $26,168 |
Now let’s put those numbers into the GDS ratio formula:
$19,488 + $2,580 + $600 + ($3,500 x 50%) = $24,418
$24,418 ÷ $82,000 = 29.78%
According to the formula, you’ll be able to afford this property on an annual salary of $82,000 because the GDS ratio is below 32%.
In our second example, we’ll assume you’re looking at a different condo with 700 square feet. The price is exactly the same but the only difference is the condo fees are $1 a square foot.
| Costs | Monthly | Yearly |
| Mortgage | $1,624 | $19,488 |
| Property tax | $215 | $2,580 |
| Utilities | $50 | $600 |
| Condo fees | $583.33 | $7,000 |
| Total cost | $2,472.33 | $29,668 |
$19,488 + $2,580 + $600 + ($7,000 x 50%) = $26,168
$26,168 ÷ $82,000 = 31.91%
With the higher fees, you’re barely able to afford this condo. The fees could increase at any time and if they do rise before you decide to buy, your lender may not approve you for a mortgage.
Additional fees
Buying a condo in an older building could mean additional costs, especially if the reserve fund is underfunded. You could face a special assessment, which is a charge to repair something major in the building, such as the parking garage or the roof. This could cost you thousands of dollars.
Getting a status certificate before purchasing will provide you with information about the condo corporation’s financial status as well as let you know whether a special assessment will be levied or whether the board is considering one.
The bottom line
Before buying a condo with high fees, make sure it’s affordable. You can use a mortgage affordability calculator and mortgage payment calculator to verify your numbers. If a condo has lower fees and you’re worried about them rising, make sure you budget and for any possible increases so you’ll be prepared for any future surprises.
RateHub.ca is a website that compares mortgage rates, credit cards and deposit rates with the goal to empower Canadians to search smarter and save money.
