You cut corners and scrimped for years to come up with that down payment – but your saving days are far from over once you’ve achieved homeownership. In fact, you’ll need to take your commitment to socking cash away to a whole other level: enter the home emergency fund.
Because owning a home is such a large financial responsibility, it’s crucial to ensure you’re protected from unexpected events that would prevent you from paying your mortgage, or repairs that could plunge you into debt. For example, if you lost your job or had to take disability leave, would it mean defaulting on your home financing? What if your furnace refuses to turn on in the middle of winter, or water seeps through the basement floor?
These are just some potential scenarios homeowners should consider. And, while having home and contents insurance can provide some peace of mind, there are more than a few instances where damage won’t be covered by a policy.
Here are a few tips for creating your emergency fund, and what it could likely be used for.
What is an emergency fund?
An emergency fund is a savings pool created for the sole purpose of covering unexpected home maintenance, repair, or payment cost. It’s good practice for homeowners to set aside even a small amount per paycheque for this fund, and to keep it relatively liquid; high-interest and tax-free savings accounts are popular vehicles to keep emergency cash for the modest earning potential and tax protection they provide while remaining accessible.
The amount you’ll need to save depends on your financial commitments and lifestyle. A good rule of thumb is to ensure that you’ll be able to cover your home shelter costs, such as your mortgage and utilities, applicable condo fees, insurance, transit, and food, for a minimum of three months if you found yourself unable to earn income.
However, home emergencies go beyond your ability to pay the mortgage – out-of-the-blue repairs, or even underestimating general maintenance, can take a big bite out of your budget, so it’s important to keep the following in mind when saving for an emergency fund:
If major appliances such as the furnace, fridge, and dishwasher are included in your home purchase, get the details on their age, any existing warranties, and whether they’ve required repairs before. If your home’s furnace is nearing the end of its life cycle at the time of your closing, for instance, it’s smart to anticipate you’ll need to set aside between $3,000 and $6,000 for a new one, plus installation in the near future.
It’s vital to get a professional home inspection to ensure your new house’s structure is sound – especially in older homes – but some issues aren’t always apparent at the time of purchase. Things like sinking floors, warping door frames, or a soggy basement can all point to developing foundation issues, which become more serious over time. Associated costs depend on the severity of the issue; it can cost a few thousand dollars to reseal a cracked foundation, while projects that require digging, re-joisting or hydraulic pier bolstering can cost upwards of $100,000.
Similarly, you’ll also need to keep an eye on the condition of your roof, and know when it was last updated; a full re-shingling is required every 20 years or so and will cost in the neighbourhood of $10,000. As such repairs fall under the category of maintenance, they generally will not be covered by a home insurance policy.
Mold and pests
Discovering a colony of termites or mold lurking in the basement can present a pricey fix. Because either can cause structural damage to the home, time is of the essence to treat the issue. Killing off pests, whether through spraying or fumigation, can cost in the $1,500 to $3,000 range, and could be followed up with additional repair or cleaning costs.
Mold can also be an extremely complicated issue; not only is it a health hazard, a widespread case could warrant the replacement of entire walls, and tens of thousands of dollars spent.
Unfortunately, these costs generally aren’t covered by a home policy, as their emergence falls under the “neglect” category in the eyes on an insurer. However, mold that is specifically caused by flooding – if it can be proven – may be covered if the homeowner has sewer backup and overland flood policies.
Acts of nature
Sometimes the biggest hit to your budget will fall from the sky. While it’s highly unlikely your home will be struck by lightning, errant tree branches torn loose by strong winds are common, and can cause considerable damage. Heavy rain causing flooding, hail, and fire are other hazards homeowners may need to consider at some point. The good news is, in most instances, these events are insurable – but you’ll still need to have the necessary cash set aside for the deductible, the size of which is dependent on your specific policy.
While homeowners carry a heavy financial burden to maintain their properties, condo owners aren’t immune to surprise costs. While general maintenance of the building and most water and electricity systems will fall under the responsibility of the condo corporation, an owner would need to pay out of pocket for appliances that are out of warranty.
Any upgrades that are made to the unit, such as new flooring, that are not part of the original build will also fall to the unit owner. For example, if a unit is flooded from above and said floors were ruined, the owners would be compensated only for the value of what was originally there.
Condo owners also live in fear of the dreaded “special assessment” – a lump sum payment demanded by the condo corporation to cover a large, unexpected expense. As joint owners in the condo corporation, unit owners have no choice but to pay their portion of a special assessment cost, which can arise for a number of reasons: losing a lawsuit, needing emergency repairs, or failing to budget adequately can all be the impetus behind one.
While it’s hard to predict when a special assessment may occur, or how big it will be, there are a few signs prospective condo buyers can look for when reviewing a unit’s status certificate. A history of previous special assessments is certainly a red flag, as is a lower-than-could be more prone to them, as well as one that keeps condo fees artificially low.
In most instances, the best way to avoid surprise costs is to know what you’re buying; the costs of paying for a home inspection, or having a lawyer review a status certificate can pale in comparison to the issues lurking in problem homes – it’s always best to be an educated shopper!
Penelope Graham is the Managing Editor of Zoocasa.com, a leading real estate resource that combines online search tools and a full-service brokerage to empower Canadians to buy or sell their homes faster, easier and more successfully. Buyers can browse homes for sale in a number of municipalities including Toronto, Mississauga, and London, Ontario real estate.