This article is a follow-up to “Is Tiny Living for You?” 

Despite my affinity for the tiny house lifestyle, I found that buying a tiny home, especially as my first property, didn’t make sense once I dug into the numbers. 

One of the main reasons I was interested in a tiny home was to accommodate a more affordable lifestyle. However, it turns out that the economics of buying a tiny home isn’t as attractive as I thought. Let’s examine how I came to this conclusion.

To illustrate, I’ve drawn out two options below: a tiny home vs a one-bedroom condo. 

One benefit of going tiny is that there are no closing costs such as legal fees, home inspection, etc. These costs have not been added into the total loan amount equation above since they’re incurred up-front. These should still be considered.

#1. Interest Rate & Max Term 

It is no secret that interest rates are currently low. On a mortgage, you can find variable rates below 1.5%, and fixed rates at around 2.5% for most. Bankers may try to suggest this all the time, but right now really is a great time to buy.

For tiny house financing, it took me a little extra time to find an agent that had experience with this type of lending. Once I did, the best rate the agent could offer was 5.5% on a 5-year fixed (August 2021). 

Note: the maximum available term on a tiny house is 20 years, regardless of the lender you choose and some may only offer 15 years.

#2. Cost of Borrowing: Initial Term and Total Cost

Over the initial five-year term, the difference in total interest paid is significant.

If rates remained unchanged for the entire term of both loans, the difference in the total cost of borrowing is not as significant: $97,627 (tiny) vs. $89,091 (condo) for a difference of $8536. Over two decades plus, this wasn’t a huge factor in my decision. 

You’re welcome for the unsolicited painful reminder of how much we pay for access to homeownership. If you’d like to torture yourself with this math on your own time, feel free to use this mortgage calculator that comes with a comparison function.

Keep in mind – with tiny homes increasing in popularity, it is very possible that interest rates could improve for these types of dwellings relative to traditional mortgages over the next decade or two, especially if/when a resale market establishes itself. For now, we’re just working with the numbers we’ve got – not what we hope they might someday be. 

#3. Monthly Cashflow Requirements

Monthly cashflows were ultimately the most important factor in my decision. As you can see, there is a pretty significant divide between the two options. 

• The comparison between the mortgage and personal loan is pretty straightforward. 

• For the condo fee, I used the amount I will be paying for my 500 square foot condo in year one. The fees include all utilities except electricity.

• For the tiny home, I had a tentative agreement in place for a place to put it for $400/month + $150 for utilities.

• Insurance costs are not factored in here, but they are roughly equal for these two options.

#4. First-Time Home Buyers Plan (HBP) 

If you’ve put serious consideration into buying your first home in Canada, odds are, you’ve come across this incentive. If you haven’t, feel free to click on the link in this paragraph’s heading to learn more.

Essentially this program allows you to access funds from your RRSP (up to $35,000) tax-free if you are withdrawing for the purpose of purchasing your first home. 

This is not free money, but it is your money. You must pay back the amount you withdrew. It is an attractive option because you will not pay tax or interest on it so long as you make your annual payment on it on time and in full. You have up to 15 years to pay it back.

If you are looking to buy a tiny home, this incentive will not be available to you. Your loan will be treated the same as if you were buying a recreational vehicle and will be classified as a personal loan, not a mortgage. Since a large portion of my savings were held in an RRSP, this played a big role in my decision.

#5. Taxes & Fees

In addition to the cost of the tiny home, since it is a new-build, you’ll also have to pay GST of 5% (in Canada) and potentially PST as well depending on where you live. 

The builder I was leaning toward working with said the average cost of the tiny home model I was interested in was roughly $150,000. 

You can build a tiny home for significantly less than this, even if you go with an established builder such as Tea Cup Tiny Homes. Tea Cup has designs suitable for a budget of around $100,000. However, I wasn’t willing to buy something without the style and functionality that I would be happy living in. I also wanted the ability to use it as a vacation rental property long term so I wasn’t going to compromise any features.

If you peruse Youtube or have dove deep into the world of tiny house documentaries you’ve probably seen that you can technically build your own tiny home yourself for $40,000 – $100,000. You’ll of course require the skills and location to build it yourself – neither of which I possess. Also keep in mind that even if the DIY approach is an option for you, financing will be a different challenge as it will likely come in the form of a personal line of credit with less of a collateral guarantee from the lenders perspective. 

#6. Re-sale market

I did look at buying a used tiny home, but I didn’t look for long. The reason being is that most banks will not give you a loan to purchase a “pre-used” tiny home, at least none that I spoke to. This could change, but for now, that’s the reality. 

If you ever needed to sell the tiny, the pool of buyers would be limited mostly to those with the ability to pay in cash – shrinking the likelihood that you’ll be able to sell it quickly if needed.

Even if you do find a buyer, just like a vehicle, your tiny home will depreciate the second you buy it. You likely wouldn’t purchase with the intention of selling it in the first few years, but if unforeseen circumstances arose and you needed to sell shortly after buying it, you’d be out a bunch of money and probably wouldn’t have enough to repay the loan.

#7. Other factors: Moving, Commuting, Unforeseeable Costs

Moving the Home

Beyond just the initial move, capitalizing on the portability of the tiny home requires you to have a vehicle capable of towing it. You might be able to use a friend’s vehicle, but then again you might not. You might just say “Oh well, I’ll just buy a bigger vehicle with the towing capacity to have the option of towing it”. Guess what? Yet another cost. Same story if you’re considering renting a vehicle when you need to move your tiny home on wheels.

Commuting Costs

For most, switching to tiny is likely accompanied by a move further out of town. Most city bylaws make it difficult to station a tiny home in the inner city. 

For me, my commute into the city for work would have been 43KM, 2-3 times per week. At the provincial km expense rate for cost and depreciation on a vehicle($0.59/km), I’d be looking at monthly commuting costs of $275/month plus the additional time spent on the road.

Overall it is not an easy or straightforward process to get yourself into a tiny home. As much as I have researched, I am still willing to acknowledge that until you actually do something, you can’t foresee everything. So, my calculations are missing whatever those unexpected costs might be. 

For a traditional condo, there may be a few of these unforeseeable costs as well, but overall I’d expect them to be less with the one big caveat of the potential for a special assessment. That’s why doing your due diligence when buying a condo is absolutely critical – maybe we’ll talk about that in-depth another time.

Not done with Tiny just yet…

Despite all of the considerations above, we always need to keep in mind that humans are not perfectly rational beings. When we’ve got our hearts set on something, sometimes there is no amount of information that can change our minds. We do not make decisions based solely on cold calculations.

However, if you were thinking that moving into a tiny home could be the solution to a tight financial situation – I’m afraid to conclude that a tiny home likely won’t be the answer.