Here is a list of the expenses typically incurred by a buyer of residential property.
1. Legal Fees: Lawyers’ fees vary. It is an issue for each buyer to raise at the time he/she engages the lawyer to close the deal.
2. Land Transfer Tax: This is a sales tax charged by the provincial government. The formula used to assess the tax is as follows: (you may also refer to the mortgage calculator on left menu which includes land transfer calculator)
§ 0.5% of the first $55,000.00 of the purchase price,
§ 1.0% of the next $195,000.00 of the purchase price,
§ 1.5% of the next $150,000.00 of the purchase price, and
§ 2.0% of the balance of the purchase price (for residential properties).
3. Property Inspection Report: Before you buy a property, it is wise to have it inspected by a qualified professional property inspector. The inspector will provide you with a written report. Such inspections cost $250.00 or more, depending upon the inspector and the size of the property.
4. Mortgage Financing Fees: Many mortgage companies charge appraisal and processing fees. These fees can be several hundred dollars. If you are borrowing more than 75% of the property’s value (“high ratio financing”), there will be mortgage insurance premiums added to the face amount of the mortgage.
5. Discharge Penalties: If the buyer is discharging a mortgage on the property he/she is selling, there may be early discharge penalties amounting to three months interest on the mortgage to be discharged. The mortgage company may be prepared to waive all or part of the early discharge penalty if the buyer agrees to mortgage the new property with the same mortgage company.
6. Survey: You may want a new survey, or your mortgage company may require one in order to advance the mortgage funds. Surveys start at about $900.00. The price goes up depending upon the size and configuration of the property.
7. Title Insurance: Most mortgage lenders are prepared to accept title insurance instead of a survey. A Title Insurance policy costs about $250.00 -$300.00 for most residential properties. The fee will vary to some extent with the value of the property.
8. Disbursements: When your lawyer closes the purchase, he/she will have to pay a variety of expenses for you. He/she will add these costs to the bill he/she sends you. Such disbursement costs include fees for registering the deed and mortgage, building and tax certificates, hydro and water status reports, etc. On a standard residential purchase, these costs will run between $300.00 and $500.00.
9. Adjustments: The annual real estate taxes will be apportioned to the seller and the purchaser as of the date of closing. If the seller has prepaid the taxes for the year, the purchaser will be required to reimburse a pro rata portion to the seller. If the property is heated by oil, the purchaser will be required to reimburse the seller for the value of the oil remaining in the storage tank on closing. The purchaser’s lawyer arranges for these adjustments with the seller’s lawyer as part of the closing process.
10. Moving Costs: Moving costs vary depending upon the distance moved and the weight and volume of possessions moved. It is wise to get an estimate from more than one mover. It is also wise to book your mover well in advance of closing.
11. Insurance Policies: You may wish to consider a closing insurance policy (about $40.00) and/or a home warranty policy ($230.00-$350.00). As well, you will need property insurance and occupier’s liability insurance. Contact an insurer well in advance of closing in order to ascertain the costs, and to have the policies in place at closing.
12. Condominium Purchase: There are some special costs involved with a condominium purchase. For example, you will want a Status Certificate, which includes all important documents concerning the financial affairs of the condominium corporation, as well as the by-laws and the rules that owners are required to abide by. The Status Certificate costs $100.00, plus photocopying. Also, a condominium owner pays a monthly maintenance fee to the condominium corporation. This fee will be apportioned between the seller and the buyer as of the date of closing.
13. Rental Property Purchase: If you are buying a tenanted property, any prepaid rents will be accounted for as part of the closing process. If the seller has collected the last month’s rent, which is standard, you will be credited with that sum on closing.
14. Rural/Recreational Properties: There are a number of issues that must be canvassed by buyers of rural/recreational properties. They include water quality and quantity, the condition of the septic system, road access, and availability and cost of municipal services (e.g. garbage collection, schools, busing, road maintenance). All such issues need to be investigated fully at the time of purchase. Some of these investigations will cost money. For example, you may be required to pay a fee for the water quality and quantity tests. Also, if you wish to have a professional assessment of the condition of the septic system, there will be a fee. You will want to consider all of these issues at the time you are considering the purchase.
15. New Home Purchases: The biggest extra cost that attaches to new home purchases is GST. GST is a 7% sales tax imposed by the federal government on new homes, as well as most other goods and services. It is not applied to purchases of resale (“used”) homes. Many builders include the GST in the purchase price. Make sure that the issue of who pays the GST is resolved in the Agreement of Purchase & Sale. Read your contract carefully. There may be additional costs for a wide variety of items, including paving of the driveway, landscaping, etc. On some new home purchases, the bill for these “extras” can be thousands of dollars.
16. Commission: In some cases, it is in the buyer’s best interests to pay the real estate broker’s commission directly, instead of having the seller pay it. By taking the commission out of the purchase price, thereby lowering the purchase price, both the land transfer tax and the commission (if it is a percentage of the purchase price) are lower, saving the buyer money.
Most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage about 4 years sooner. This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you paid.
Paying extra amounts on your mortgage can make a big interest saving over time. When we select a mortgage company, privilege payments options are something that we look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100 000 mortgage. It is important that the privilege payment also be flexible to allow you to pay smaller payments on the mortgage and as often as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster.
When you require a mortgage for more than 75% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these company`s decreases as the down payment increases. When you finance your property at 95%, a premium of 2.75% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.5%. If you can put down 25%, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium.
As mentioned above, when you put a 25% down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.
The options for mortgages available can be very confusing for most mortgage shoppers. Terms for mortgages vary between variable and fixed rate, 6-month terms to 10 year terms. Taking a variable or floating rate mortgage can have savings. Typically the shorter the term or guarantee of the rate, the lower the rate will be. This does not always happen, depending on the market place and the economy, but history has shown that short-term rates tend to be lower than long-term rates. The up side of variable rate is the strong potential for interest rate savings. The down side is the fact that you are accepting the interest rate risk without a guarantee. If you are considering a variable rate mortgage you need to look at your own risk tolerance, and your cash flow available to deal with potential increased payment. Considering projections of rates and where we see interest rates heading can also be important in this decision. Make sure you talk to an expert when you are making this decision.