Hidden home buying costs to consider

Expenses to consider when purchasing a home

When you think of the cost of buying a home, expenses like the down payment, realtor commission and moving costs probably come to mind. While these expenses usually make up most of your spending, there are other costs associated with home buying that people often overlook. Check out this list of costs you might encounter at different stages of the home-buying process.

Before closing

Home inspection

  • It’s a good idea to have your property evaluated by a certified home inspector. They’ll check things like the foundation, heating and cooling systems, electrical service, the roof and plumbing – important details you’ll want to know about before making an offer.
  • Approximate cost: $500

Down payment deposit

  • After your formal offer is accepted by the seller, you’ll need to make a deposit on the purchase price. This Hidden Home Buying Costsamount will be applied to your final payment of the purchase price.
  • Approximate cost: Variable, can be up to 5% of the property’s purchase price

Appraisal/property valuation

  • Before you’re approved for a mortgage, your lender may require an appraisal of the property’s value.
  • Approximate cost: $250–500, but sometimes waived by the mortgage lender

It’s important to consider all additional expenses before beginning the home-buying process to stay within your budget.

At closing

Legal or notary fees

  • Your lawyer or notary charges fees to search the property’s title to confirm that the seller currently owns the property and what liens (such as mortgages) are registered against the property that will have to be cleared at the time of sale. They will prepare the documents required to complete the sale and ensure that you receive title to the property you are buying.
  • Approximate cost: $500–$1500

Property survey and/or title insurance

  • A property survey is optional but sometimes requested by the lender. It’s used to verify the property’s boundaries, measurements of the land and position of the building on the property.
  • Title insurance is often used when a survey can’t be located or doesn’t exist. It’s used to protect ownership of the property and is typically purchased through your lawyer. It protects you against title fraud and may protect you against identity theft and fees that came up when your lawyer or notary conducted the property title search.
  • Approximate cost: Property survey: $750–$1,000; title insurance: varies based on property value; one time cost

Land transfer tax

  • This is a tax charged upon transferring the ownership of the property to a new owner. In some provinces, land transfer tax refunds are available for first-time home buyers.
  • Approximate cost: A percentage of the property’s purchase price, variable by province. Some cities charge an additional municipal land transfer tax. Visit your provincial government’s website for more information.

GST/HST/QST

  • These taxes are generally only charged on new homes, not resale properties; however, some existing properties aren’t exempt.
  • Approximate cost: A percentage of the property’s purchase price, variable by province. Visit your provincial government’s website for more information.

Pre-paid expenses

  • If the seller has already paid for future expenses such as property taxes or utility bills, you’ll need to reimburse them as part of the legal closing process.
  • Approximate cost: Variable

Property taxes

  • Property taxes can be paid in different ways – as an upfront annual cost, in installments throughout the year, or as part of your ongoing mortgage payments.
  • If you opt for property taxes to be included in your mortgage payments, your lender will make payments to your municipality when due.
  • If you decide to make direct payments, contact your municipality to find out the amount you need to pay and when taxes are due.
  • Approximate cost: Variable

After closing

Transfer fees

  • Some companies, especially utilities, charge a disconnect/reconnect fee when moving; you’ll likely see this on your first bill after moving.
  • Approximate cost: Varies by company

Utility deposits

  • If you’re a first-time home buyer who’s never held a utility account, the utility company will usually require a deposit for the first year.
  • You’ll likely get this money back in the form of a credit to your utility bill, either as a lump-sum or in instalments.
  • Approximate cost: Varies by company

Mortgage default insurance

  • If your down payment is less than 20% of the total purchase price of your home, you’ll have a high-ratio mortgage.
  • High-ratio mortgages require you to buy mortgage default insurance, which protects mortgage lenders in the event homeowners can’t pay their mortgage.
  • Approximate cost: Varies depending on size of down payment; can be added to your ongoing mortgage payments

Home insurance

  • Home insurance offers protection for your home and its contents in the event of fire, natural disaster, theft or other unfortunate circumstances, and is required by lenders. Policies vary according to the options you choose and are priced according to the level of protection.
  • Approximate cost: Variable, paid annually or in instalments

Managing the cost and logistics of buying a home can be a big job. It’s important to consider all additional expenses before beginning the home-buying process to stay within your budget. Don’t forget that home ownership also often involves repairs and renovations as well the cost of furniture and décor. You may also want to evaluate which type of insurance coverage is right for you.

If the thought of buying a home makes you anxious about your finances, I can help you prepare and assess your financial readiness for home ownership, and lead you through setting goals towards owning the house you dream of.

Are You Ready to Dive into a Mortgage?

All homeowners dream of burning their mortgage papers after making that final payment. Smart planning and prudent decisions will help make that day arrive sooner than you’d think.

However, before plunging into the real estate market, you should estimate how much you can afford. There are many online tools that can help you do this.

Lenders want to make sure your total monthly housing costs – including mortgage payments, taxes and utilities – do not exceed one-third of your household’s total gross income and that your total debt load (including car loans) is not above 40 per cent of your household’s total gross income. All lenders have software programs that can compute how much they’re willing to lend and how much house they expect you can afford to purchase.

That first big payment

A big down payment could be a great way to reduce the size of a mortgage. But people who don’t have a lot of money saved – and don’t want to wait to build a larger down payment – can take on a high-ratio mortgage. Borrowers in Canada with less than a 20 per cent down payment must purchase mortgage insurance, which protects the lender in case of default. This could cost up to 3.35 per cent of the value of the mortgage and typically gets tacked onto the principal.

Options to consider when choosing a mortgage

It’s important to consider these topics when choosing a mortgage:

  • Fixed or variable interest rate
  • Amortization period
  • Length of term
  • Open or closed

The fixed-versus-variable-rate decision has long been debated. A few years ago, Moshe Milevsky, a professor at York University, authored a report which suggested prospective homeowners go with a variable interest rate mortgage.1 But since variable rates could go up any time, many borrowers opt for the more stable fixed-rate mortgage.

Today, the advantage of variable rates is uncertain. Yes, they remain below fixed ones, but the gap has become razor thin – to the point where potential savings may not justify the risk of variable rates climbing.

Risks not so variable

For small increases in the variable rate, the payment size may remain the same. The only difference would be an increase in the amount going to pay the interest portion. However, if rates increase significantly, even by 1.5 per cent, the lender may increase the payments.

Before deciding on a variable rate, make sure the lender explains all of the possible scenarios. Specifically, find out what interest rate changes will trigger higher payments. You may be able to include the option to lock into a fixed-rate mortgage at any time, but keep in mind that by then the longer-term rates may have changed.

Fortunately, you can use a mortgage calculator to easily determine the savings of going variable versus fixed. You may decide that the upside isn’t enough to forgo the certainty provided by a fixed-rate mortgage.

Mortgage

Coming to terms

Mortgage terms can range from six months to 10 years. Generally, the interest rate rises with the length of the term.

The advantages of an open mortgage

Fixed-rate mortgages are generally closed. They typically allow for yearly lump-sum prepayments up to 20 per cent of the original mortgage, depending on the lender – a very important detail you ought to confirm before signing. You may also be able to increase your regular payments, as much as doubling them – perfect for people with steadily rising incomes.

Paying off the mortgage all at once or breaking it up to get a better rate often triggers financial penalties. Some lenders do offer open mortgages, which allow borrowers to pay off some, or all, of the loan at any time. However, there’s a catch: the interest rate may be significantly higher.

If there’s a chance you’ll come into some money or sell the mortgaged home before the term expires, an open mortgage could make more sense. If you plan to move before the term expires, a portable mortgage (one that can be transferred to your next home) may also be an option worth considering.

  • Of all the variables to choose from, a shorter amortization period offers the fastest route to a mortgage-burning party.

Which should you choose: A long or short amortization period?

Of all the variables to choose from, a shorter amortization period offers the fastest route to a mortgage-burning party. By law, Canadians can negotiate a mortgage that extends to 25 years. Long amortization periods are popular, especially with first-time homebuyers, since they could lower the amount of each mortgage payment. However, those lower payments could come with a price – higher interest rate costs.

Anyone taking out a mortgage ought to become very familiar with a mortgage calculator. Try plugging in shorter amortization periods and compare the increase in payments with the drop in interest costs. The sweet spot is often around 20 years, where the increase in payments isn’t so big but the savings in interest costs could be significant.

Accelerated payments could help you pay off your mortgage faster

You can pick weekly, bi-weekly and monthly payments, depending on the lender. More frequent payments will mean you’ll pay less interest over the life of the mortgage with the same interest rate.

You can also opt for “accelerated” payments that shave time off your total amortization period. While giving your lender payments a few days earlier doesn’t save much interest, accelerated payments can increase the total payments you make each year­ ­– helping you pay off your mortgage faster.

If you value simplicity, increase your total annual payments but add them up and divide by 12 to compute the equivalent monthly payment.

It’s time to get started

Once you’ve decided to purchase a home, consult with me, I can show you how and why you should build your mortgage into your financial security plan.