Okay, so you’re thinking about buying a home – what’s the first thing you do? You’re probably going to start your search by looking at homes online and how much they cost. But the truth is there’s a lot more to the cost of buying a home than just your monthly mortgage payments.
Home purchases come with many hidden fees that buyers should be aware of before pulling the trigger. Whether you’re new to the housing market or a return customer, this list will serve you well in your future home buying pursuits.
The initial payment you make towards your home is called a down payment. The down payment is deducted by your lender from the total cost of your home, and the rest of the cost is covered by your mortgage.
Your down payment is essentially your skin in the game.
The minimum amount you’ll need for the down payment depends on the purchase price of your home. Down payments are usually five to twenty percent of the cost of a home at purchase price, and you’re required to make a down payment of at least five percent with most lenders. Major banks and credit unions require a minimum of five percent downpayment, however, some private lenders will allow for less. Those loans typically have higher interest rates which means you pay more over time.
Suppose the home you are buying costs $400,000 and you put 10 percent as the down payment. Ten percent of $400,000 equals a down payment of $40,000.
If your down payment is anything less than 20 percent of your home’s value, you can add the cost of mortgage insurance to your list. Which brings us to our next point.
Mortgage insurance, sometimes called mortgage default insurance, is an added fee that sounds friendly. In reality, it’s a precautionary measure to protect your lender in case you can’t make your mortgage payments.
The fee you pay for mortgage insurance is called a premium. The premiums range from 0.6 percent to 4.5 percent of your mortgage. As you’ll find out, a lot of your home’s interests are staked in the down payment you made. Your premium is dependent on the size of your down payment. The bigger your down payment, the less your mortgage insurance premiums will be.
Premiums can be paid in a lump sum or by adding them to your mortgage. But be warned, although it might be more convenient to pay it off in installments, if you add your premium to your mortgage, you’ll end up paying interest. However, the interest rate is the same rate as you’re paying for your mortgage.
If you live in Ontario, Manitoba, and Quebec, you’re subject to provincial sales taxes levied on mortgage insurance premiums.
You might be required to get mortgage insurance even if you have a 20 percent down payment, which could happen if you’re self-employed or have a poor credit history. Sometimes, you can’t get mortgage insurance if the home you’re trying to buy is over a $1 million or the mortgage loan is inadequate to the insurance company.
Most mortgage insurance policies in Canada are provided by Genworth or CMHC.
When you’re planning on buying a home, making a deposit is like a formal show of good faith. This isn’t the same thing as a down payment however when your lawyer is handling disbursements will be applied toward your down payment. The seller doesn’t need to know the nitty-gritty of your finances, just that you can afford to purchase their property.
After the seller accepts your offer, you typically have 24 hours to make a deposit on the home you agreed to purchase, those these terms may vary depending on your market. The details and the amount of the deposit will be outlined in your Agreement of Purchase and Sale and your REALTOR® will help you understand what is due and when.
If your purchase falls apart based on conditions in the offer, you will receive your deposit back. However, if the purchase falls apart because of a breach of contract on your (the buyer) part, the deposit is usually forfeited to the seller.
Lawyers are responsible for, among many other things, closing the sale. They handle the exchange of funds between you, your lender, and the seller on the closing day. They are also responsible for the title search (ensuring the home you’re buying is free and clear of any liens or holds) and transferring the deed to your name.
But lawyers aren’t free. Your legal fees will depend on a variety of factors, including the complexity of the purchase, the lawyer’s expertise, and the type of home you’re purchasing. You can probably expect to pay anywhere from $1000 – $1,500 in legal and disbursement fees.
The price of title insurance is a separate cost and depends on the purchase price of your home. Let’s use the example of the $400,000 home, the same as above. You can expect approximately $150 – $350 for title insurance, though that cost may increase for more complicated titles.
Title insurance is a protective measure for homeowners against unforeseen threats to their title such as ownership disputes, title fraud, un-discharged liens, encroachments, zoning issues, survey problems, and property tax arrears.
Just like you test drive a car before buying it, it’s a good idea to get a home inspection so you know what you’re getting into. A professional inspection is the best way to tell if there are any major problems or defects with a home.
Home inspections typically cost around $500. You may also need a well or septic inspection depending on the property you’re buying, a structural engineer review, or a WETT inspection and certification. Each of these is billed separately and usually performed by different people.
The inspector will identify any components in a home that are potentially unsafe, require repair, and let you know the potential longevity of the systems in the home such as the roofing and HVAC.
Land Transfer Tax
The land transfer tax is something which is often overlooked, but all provinces have some version of it, and so do some municipalities. While in most places, buyers are only subject to provincial land transfer tax, in cities like Toronto, you have to pay a municipal tax as well that is equal or close to equal the provincial tax.
The cost of land transfer tax is calculated as a percentage of the property value. First time homebuyers in Ontario, BC, PEI, and Toronto are offered land transfer tax rebates to help offset the costs.
The cost of home insurance can vary, depending on where you live, how much your home is worth, and any potential red flags that your insurance provider may pick up on. Things like a home’s wiring, flood plains, and area crime rates all impact the cost of home insurance.
In 2018, the average annual home insurance cost in Ontario was $1,300. However, your own rate could be anywhere from $1,000 – $3,000 per year.
One of the most important factors to take into consideration when calculating your home insurance rate is the replacement value of your home. This is the material value from renovations and additions that have been made to the home, not the original sale price. It’s important to keep an eye on liability and comprehensive insurance as well that protects you from lawsuits if someone gets injured on your property.
Throughout the course of your real estate transactions, your lawyer and notary are likely to make out-of-pocket purchases on your behalf, called disbursements.
These fees tend to include costs like land title and tax searches, land title registration fees, digital execution fees, agent’s fees, courier, postage, copies, and other petty office expenses.
They also include costs payable to the seller such as compensation for any fuel left in on-site oil or propane tanks and reimbursement for the property taxes on the home, prorated from the date of possesion.
Condo owners will need to pay for something called a status certificate. Status certificates are roughly $100, depending on where you live, and must be delivered by the condominium manager within 10 business days.
The status certificate details the financial standing of the condominium corporation as well as the financial status of the unit you are interested in buying. If there are any special assessments or condo fees in arrear, they will appear here.
Buying a home is expensive, but the best way to be prepared to make a purchase is to know what to expect. Though the costs add up quickly, paying into your equity, instead of someone else’s, is a long term investment that will put more money in your pocket and provide more security for your future.
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