Buying a home is unlike any other consumer purchase.
“There are costs that just don’t exist anywhere else,” says Phil Soper president and CEO of Royal LePage Real Estate Services, Toronto. There are often costs involved in buying a home that many first time home buyers have never heard of, particularly if they didn’t do their homework or seek good advice during the transaction.
That’s where a realtor can come in handy, says Elton Ash, regional vice-president of Re/Max Western Canada, Vancouver.
“You’re paying a realtor for a service,” says Soper. “That service goes well beyond simply sales service. The realtor should be willing to take the novice purchaser through the entire process, including a summary of all the costs and steps necessary to complete the transaction.”
A realtor can help you through the process of how to buy a house but buyers should do some independent research on their own, Soper suggests, compiling a list of topics and questions around buying a home, and then interview prospective realtors. A realtor’s ability to answer these queries should play heavily in a buyer’s decision.
While coming up with a down payment is a critical step, a first time home buyer must also consider other costs of buying a house. Mortgage calculators can provide help in anticipating how much you can borrow and at what rate.
“Most purchasers are so consumed with accumulating the down payment and qualifying for a mortgage that small details such as closing costs and land transfer taxes slip through the cracks,” says Michael Polzler, vice-president and regional director, Re/Max Ontario-Atlantic Canada, Toronto.
Any home buyer can expect to pay from 1.5% to 4% of the purchase price of their home in closing costs. “If you use that as a rule of thumb or benchmark, that will help you be better prepared for the costs that may come at closing time,” says Bernice Dunsby, senior manager, home equity financing for Royal Bank of Canada, Toronto.
“Some of the costs are optional, but they won’t be options for a prudent buyer,” adds Soper.
To help clarify what the costs associated with buying a house are, here’s a list of some of the expenses you can expect to incur when you’re thinking about buying your first home.
Deposit and down payment
Once you’ve found your home, and you’re ready to make an offer to purchase, a deposit is required at that time to help hold the house for you. The cost of the deposit varies depending on the area, but it may be up to 5% of the purchase price, according to CMHC. This deposit counts towards your down payment.
You can make a down payment of as little as 5% of the purchase price, but you’ll need to buy default insurance, or what is sometimes referred to as high-ratio mortgage insurance. This doesn’t benefit you – it protects the lender in case you cannot make your mortgage payments. It can be provided by Canada Mortgage and Housing Corp. (CMHC), or private insurers such as Genworth. Premiums can vary anywhere from 0.5% to 3.5% of the mortgage, depending on the size of the loan, says Dunsby. Premiums can be added to the balance of your mortgage or you can pay the whole amount upfront.
If you have a 20% down payment, mortgage insurance is not required.
You may also want to consider mortgage life insurance through your lender or a term life policy that would cover the cost of your mortgage, should something happen to you. Generally, term life insurance can be 20% to 30% cheaper than traditional high-ratio mortgage insurance, says financial advisor, Brian H. Chick of Sun Life Financial, Toronto. But if you already have a life insurance plan and don’t want to add to it, high-ratio mortgage insurance would do the trick.
Your down payment can come from personal savings and assets, RRSPs, donations or gifts from families, a tax free savings account or, in some cases, lender cash-back programs.
While it’s beneficial to know how much any prospective house you’re looking at is worth so you can negotiate price, home appraisals are also used to protect the lender’s interests. It’s likely your lender will ask for a recognized appraisal in order to complete a mortgage. Typically, the lender won’t lend a buyer more than the property’s appraised value because if the buyer defaults and the lender must foreclose the house, they need to be able to sell it for the amount that was lent out plus the costs of the foreclosure.
Usually, the cost of an appraisal ranges from $250 to $350. However, Ash says some lenders will pay for the appraisal fees to get the business.
Because mortgage pre-approvals are performed based on the purchase price of a home, and home appraisals are done after the offer is no longer conditional, problems can occur, says Denise Lash, condominium lawyer with Heenan Blaikie.
If the home is appraised at a lower value than what the home has been purchased for, buyers may have to pay the difference or in some cases, the lender may not approve the loan, she says.
However, Lash offers a tip for buyers – put a condition in your offer to purchase, stating that the appraisal needs to at least match the purchase price. “In this marketplace, you should be able to put in a condition – and it’s a good tip because it gives the buyer protection.”
Home inspection fee
In the resale market, it’s fairly standard practice for realtors and some lenders to advise their clients to contract an independent home inspection, says Kevin Conroy, vice-president of national mortgage sales for ScotiaBank. Typically performed by engineers, a home inspection is a report on the condition of the home and costs about $500, depending on the complexities of the inspections.
Home inspections are recommended to identify if there are any other potentially costly expenses – issues not visible to the naked eye – that may impact the costs and upkeep of the home, says Dunsby. These are things you’d want to be aware of before making a decision to purchase, she says.
“I would recommend it so you know what you’re getting into and there are no surprises after the fact. For instance, if you find out there’s a leak in the roof after you move in, that’s something that could have been negotiated to be fixed before moving into the home.”
Estoppel certificate fee
When making an offer to purchase a condominium, it’s a good idea to ensure your offer is conditional upon obtaining and having time to review an estoppels certificate. This fee (not applicable in Quebec) applies if you’re buying a condominium or strata unit and could cost up to $100, according to CMHC. Rather than purely appraising the value of the condo, an estoppel certificate verifies the legitimacy and fiscal health of the condominium corporation or strata council. Paying the fee will give you or your lawyer the opportunity to review the condominium’s governing documents, financial statements and insurance coverage, according to CMHC. It ensures the condo is in good condition, or if it’s a new unit still under construction, it ensures the project is viable and the financials are in good shape, says Conroy.
Land transfer tax
Land transfer tax is specific to each province and is a percentage of the purchase price, usually 0.5%, says John Deacon, a condominium and real estate lawyer with Deacon, Spears, Sedson & Montizambert in Toronto. However, some provinces, such as Alberta and Saskatchewan, have no land transfer tax, while others offer a full or partial exemption for the first time home buyer.
A first time home buyer in Ontario qualifies for a maximum $2,000 (tax on a $227,500 home) provincial rebate and if you’re buying your first home in Toronto, a maximum $3,725 (on a $400,000 home) City of Toronto rebate, according to the Toronto Real Estate Board.
If you’re a first time home buyer in British Columbia, you may be exempt from property transfer tax if you and the property meet certain requirements. For instance, if you have lived in the province for 12 consecutive months before you register the property and if its fair market value is not more than $425,000, the land is 0.5 hectares or smaller and it will be used as your principal residence, then you may be exempt.
In New Brunswick, the land transfer tax payable is currently 0.025% of the value of the property. For example, on a purchase of a house assessed to be worth $100,000, the tax payable is $250. However, the province’s 2009 budget proposes to introduce a first time homebuyer tax credit – a $5,000 non-refundable income tax credit amount on a qualifying home acquired after Jan. 27, 2009. For those eligible, the credit will provide up to $750 in federal tax relief starting in 2009.
Other legal fees
You can expect to pay from $500 to $1,000 plus GST/HST for legal fees when purchasing real estate, says Deacon, plus an additional $200 in legal fees relating to the mortgage.
For a new condominium, there are two closings – a possession closing and a title closing which will increase the legal costs about $1,500, because there is more documentation.
Property and title insurance
Besides high-ratio mortgage insurance, your mortgage lender will require you to have property insurance in place on closing day. This insurance covers the cost of replacing the structure of your home and the premiums depend on the value of your home, according to CMHC.
Your lender or lawyer may also suggest you get title insurance to cover the loss caused by defects of title to the property. For instance, it offers you protection against previous owners failing to secure proper building permits. So if they put an addition onto the house and didn’t meet the building code, you would not be responsible for any costs related to that, according to First Canadian Title, Oakville, Ont.
The price of title insurance is a one-time premium when purchasing the home. For a home worth $500,000, the cost would be about $350.
Prepaid property tax or utility bills
“Let’s say you’re buying a resale home and the closing date of that resale home you just purchased is the middle of the month, say Jan. 15,” says Dunsby. “The previous homeowner may have already prepaid taxes or utility bills for 15 days of that current month, so there could be some adjustments back and forth to compensate if they have.” Be prepared to reimburse the seller for prepaid property tax and utility bills should they request it.
Survey or Certificate of Location
The mortgage lender may ask for a current survey or certificate of location before signing off on the loan. The lender will want to have some assurance that the house being purchased is completely situated on the property and there are no significant encroachments. If the seller does not have a certificate of location or doesn’t agree to get one, you will be responsible for paying for it. A survey or certificate of location can cost from $1,000 to $2,000.
While it’s easy to get wrapped up in the emotion of buying your first home, it’s important to educate yourself, with the help of mortgage specialists and realtors, about all associated costs.
“You want first time home buyers to be excited about it, and not financially distressed beyond the normal stuff,” says Ash.
You’ll need to consider all of these things when you’re figuring out the price bracket you should be shopping in.
Insuring peace of mind
You wouldn’t purchase the first home you look at, nor should you settle for the first time homeowner’s insurance policy you’re offered. Shop around to get the best deal – and coverage – possible.
The key to acquiring the best policy, experts agree, is to shop around and not buy into the first one you see. It’s a competitive market and there are often special deals and discounts available.
Homeowner’s insurance varies from insurer to insurer, property to property. To get the best possible coverage it’s important to research and compare rates.
There are a few standard types of coverage, according to the Insurance Bureau of Canada. Comprehensive coverage is the most inclusive and covers the unit and its contents, except for some that are specifically excluded. Basic, or named perils, is a money saver and is purchased for individual items. Only what is stated in the policy will be covered. Broad coverage is a mid-priced policy that provides comprehensive coverage on big-ticket items and specific named perils stated in the policy.
Policies often have restrictions on the type of accidents that are covered. Damage caused by flooding, for example, is usually not covered. You should ask your insurer for a detailed list of coverage inclusions, as well as deductibles, the amount paid when you file a claim. Generally speaking, the lower the deductible, the higher the premium.
There are many outlets that offer such coverage, including independent firms, those linked to financial institutions and insurance brokers. Some companies provide quotes online.
One option to finding a certified insurer might be to use the services of a broker, since they represent several companies and their job is to get you the best rate and policy that caters to your needs. This route might appeal to people who don’t have the time to shop around.
Since insurance policies vary between companies, different firms have their own deals and special packages. For example, if you get your auto insurance and homeowner’s policy together, there is usually a discount. Newer dwellings also tend to have discounts.
Beware the ‘phantom mortgage’
If, like many first time home buyers in Canada, you’re considering buying a brand new condo, reading this story could save you thousands of dollars. Or at least help prepare you for costs that otherwise might surprise - or shock - you.
It’s called the ‘phantom mortgage,’ also known as occupancy fees. Indeed it is a scary proposition, and here’s how it works.
In the agreement to purchase, which for pre-construction condos can be more than 20 pages long, there is a clause which addresses interim occupancy. This is when a condo is mostly physically completed and is deemed ready to occupy, but before it has actually been registered as a legal condominium. Still, the developer can tell you that you must move in and begin paying ‘occupancy fees.’ These are a calculation of the mortgage amount (based on current posted rates), plus maintenance fees plus taxes, all rolled into a monthly fee. The standard allowable period in most agreements is 18 months.
So, this means that you could essentially end up paying rent to the developer, for up to 18 months, on a condo that you already purchased. The occupancy date is set by the developer and you cannot change it. As soon as the developer tells you that you must start paying the fees, the period begins. And, the developer can extend the original 18-month period, which is very common. Meanwhile, you as the buyer really have no recourse, since this is all usually spelled out clearly - somewhere - in the agreement of purchase.
On top of all that, although the condominium may be ‘liveable,’ it’s usually not comfortable. The amenities, common areas and even the hallways are often incomplete. And since transfer of title has not officially taken place, you cannot sell your unit during this time or even rent it to a tenant.
The question, then, is how do you protect or at least prepare yourself?
- Be thorough: In your research and in reviewing any agreement, and consult your lawyer and realtor before buying a new condo.
- Buy on higher floors: Typically the highest floors have the shortest occupancy (phantom) period.
- Buy only from reputable developers: Builders don’t want to prolong the period any longer than necessary. A reputable developer will have a good track record, and be able to inform you what their standard time frame is for occupancy. But don’t take the sales staff’s word for it. Ask for proof of the company’s track record.
- Expect delays and plan for them: Developers rarely meet occupancy or closing dates. If you’re buying a new development, delays are the norm, not the exception.
Source: Chad Bradley, sales representative with Coldwell Banker Terrequity Realty, Toronto
Checklist: All closing costs and associated fees
Cost of home
- Purchase price
- GST (on new/significantly refurbished homes)
- Appraisal fee
- Down payment
- Estoppel certificate fee (for condominium/strata unit)
- Home inspection fee
- Land registration fee
- Legal fees and disbursements
- Mortgage broker’s fee
- Mortgage loan insurance premium (can be included in your mortgage)
- Prepaid property taxes/utility bills
- Property insurance
- Survey or certificate of location cost
- Title insurance
Source: Canada Mortgage and Housing Corp.