When you purchase a new home, there are many additional costs beyond the purchase price for which you will be responsible before you are handed the keys. In this Home Trust Mortgages Blog article, we will look at some of these additional expenses and provide a rough idea of the cost you can expect for each item.
While total closing costs will vary by region, you can expect them to equal somewhere between 2 – 4% of the purchase price. In fact, most lenders will require proof that you have sufficient resources beyond your down payment in order to manage these expenses.
To help you understand not only the costs you will incur during the purchase process, but also when you are required to pay, we’ve broken this discussion into the following phases:
- Costs when making the offer
- Costs prior to closing
- Costs due at closing
Costs When Making the Offer
The main cost you face when presenting your offer is the deposit. The purpose of the deposit is to demonstrate the sincerity of your offer and to show that you have the means to purchase the property.
The rules regarding deposits vary by jurisdiction; in Ontario, for instance, you can include your deposit with the offer or within 24 hours after your offer is accepted by the seller. Also, there are no specific rules as to how much is required for a deposit but for in-demand markets where sellers typically receive multiple offers, a higher deposit may help swing the deal in your favour.
For this reason, it is not uncommon to see deposits of up to 5% of the selling price in these markets. In less active markets, smaller deposits are more common.
Keep in mind that the deposit is considered part of your down payment so providing a higher deposit does not mean you are paying more for the house. However, be very clear on the rules around deposits. If your offer is accepted but the deal then falls apart later, depending on the cause for the collapse, you could be forced to forfeit your deposit.
Costs Prior to Closing
In some situations, in order to secure a mortgage your lender will require you to arrange for an appraisal of the property as well as a home inspection. An appraisal provides a third-party, expert assessment of the true market value of the property you are considering and this will likely cost between $300 and $500.
A home inspection, even if not required by your lender, is still something to consider to provide peace of mind that the property has no major issues waiting to surface after you take possession. If possible, consider making your offer conditional to a satisfactory inspection result. However, be aware that if a competing offer is presented at the same time as yours that does not include this condition, the seller may exclude your offer to go with one that does not contain additional conditions.
The Canadian Association of Home & Property Inspectors website estimates the price of an inspection for a typical single family home to be around $500.
Costs Due at Closing
Land Transfer Tax
Land transfer taxes vary by location but all Canadian provinces have some form of tax that must be paid by the buyer to transfer the property’s title. Some municipalities including the City of Toronto impose an additional land transfer tax on all property transactions and these taxes are due on closing.
In some cases, utility bills, taxes, or other expenses associated with the home may have been prepaid by the previous owner. In this situation, you will be required to reimburse the seller for any portion that may extend into the time when you officially take possession of the home. These expenses will be listed in the Statement of Adjustments.
Property Insurance and Title Insurance
Your lender will insist that you have sufficient property insurance to cover the cost of replacing your home in the event of a fire or other incident. The cost for property insurance varies by location and property value.
In addition, many lenders now also require you to have title insurance. As noted on the Financial Services Commission of Ontario (FSCO) website, title insurance protects you from potential problems that could prevent you from having clear ownership of the property including the existence of previous liens against the property as well as the possibility of land survey or public record errors.
Title insurance typically costs the average homeowner between $200 – $300.
New home buyers are advised to hire a lawyer that specializes in real estate to ensure that all official documents are completed and filed as required. Budget at least $500 for even the most straight-forward of transactions.
Provincial Sales Tax on Mortgage Insurance
If you have less than 20% of the selling price available as a down payment, your lender will require you to obtain mortgage default insurance through an agency such as the Canada Mortgage and Housing Corporation (CMHC). Your lender will include the cost of this insurance in your mortgage, but at the time of closing, you will be required to pay any provincial sales tax owing on the purchase of the insurance.
While we can’t anticipate every extra cost you could possibly face in the purchase of your new home, this discussion should give you a good idea of the most common expenses. Ultimately, what you need to take away from this is that there are many additional expenses beyond just the purchase price which you will face when buying a new property.
This article was written by Pino Decina, EVP Residential Mortgage Lending Home Trust Company and was originally published on the HomeTrust blog here on Feb 23rd 2017.