When it comes time to get serious about purchasing a home, it’s important to do your homework and make sure you have a team of knowledgeable professionals working with you: a realtor familiar with the area in which you’re shopping around, a notary or lawyer who can work around your schedule, and a mortgage broker who understands your needs and has helped you with the pre-qualification process.
Perhaps you’ve saved up enough of your own money for a down payment. Or maybe you’re being gifted the funds by a generous family member. Regardless, in addition to down payment funds, you must also have money set aside for closing costs. Total costs will vary according to the transaction, but your mortgage lender will want to know that you have additional money on the sidelines to cover these costs. Some lenders will require proof that you have 1.5% of the purchase price available for closing costs, especially if it’s a high-ratio purchase (less than 20% down). So an important part of the homework leading up to purchase time is gathering estimates of any fees & costs that may be applicable to you. The following is a list of potential, but not exhaustive, closing costs you may encounter upon completion of your purchase.
Mortgage default insurance
You may be more familiar with the terms CMHC or Genworth insurance, as they are the largest mortgage insurers in Canada, with Canada Guaranty being the third. Mortgage default insurance provides protection to your lender if you happen to default on your mortgage. If you are putting less than 20% down, your mortgage is known as a high-ratio mortgage and subject to a mortgage default insurance premium. The premium is calculated as a percentage of the mortgaged amount and the percentage will vary based on the total down payment. For example, if you put between 5 and 9.99% as down payment, your insurance premium is calculated at 4% of the loan amount. If you can manage a down payment of 10 to 14.99%, the premium drops to 3.1%. You can opt to pay the insurance as a lump sum, but the majority of borrowers simply have the premium added to the mortgage amount and amortized with the rest of the loan.
Property transfer tax
In B.C., when you purchase or gain an interest in a property, you’re responsible for paying property transfer tax. The tax is based on the fair market value of the property at the date of registration, unless you qualify for an exemption, which can be granted under certain conditions to first-time home buyers or buyers purchasing a newly built home. In B.C., the tax is charged at a rate of:
- 1% on the first $200,000;
- 2% on anything over $200,000 up to and including $2 million; and
- 3% on anything over $2 million.
For example, if the fair market value of a property is $600,000, the tax owed will be $10,000.
Newly built homes are subject to GST at purchase. There are rebates and exemptions available and your solicitor should calculate the amount payable for you. The GST is added to the purchase price, less any rebates. Your down payment will be calculated based on this total purchase price.
This insurance must take effect from the moment you are the owner of your home. Certain types of properties can be more challenging to insure and it’s always a good idea to research the property you’re interested in purchasing to see how much insurance will cost. Some lenders, such as local credit unions, will require additional earthquake insurance. Home insurance typically costs around $1,200 per year, but costs will vary depending on the type, location and any unusual characteristics of the property, such as outdated construction materials.
Home inspection fee
The purpose of a home inspection is to ensure you are making a sound investment. A good home inspection should cover nearly every element in and around a home and other structures on the property. Roofing, full exteriors, structural elements, full interiors, plumbing, electrical, heating and air conditioning, and all of the components of these are subject to inspection. It is a good idea to do your research before hiring a home inspector. Your realtor may be able to recommend someone, or you can check with friends or family to see who they have used. A good home inspector will spend three to four hours going over your home, then spend time with you explaining his/her findings. Inspectors provide a written report documenting any concerns that need to be addressed. You can expect to pay $400-$500 for an inspection.
An appraisal is not the same as a home inspection. While a home inspection is more for your own peace of mind, your lender may require an appraisal to confirm fair market value. Most lenders will pass the cost of an appraisal on to you. Depending on the location and complexity of the property, an appraisal can cost anywhere from $300 to $1,500. Some lenders have an internal valuation system they use with the intention of bypassing the appraisal requirement. If the property passes this test, there is usually a much smaller fee associated with it.
Title insurance is mandatory with most lenders. The price can vary based on property value, but is typically about $250. In addition to protecting against title fraud, this insurance will protect the lender from various issues with the property, such as violations of municipal by-laws or encroachments onto an adjoining property. It’s important to note that this insurance is for the benefit of the lender. Homebuyers can purchase an additional personal policy if the choose. It is relatively inexpensive if the two policies are purchased together.
Legal fees and disbursements
On a straightforward transaction, legal fees typically run about $1,200-$1,400. Your solicitor will also calculate any money that is owed to the seller for your portion of items that have been paid in advance, such as municipal property taxes or utility bills.
As your mortgage broker, I will do my best to make sure you’re aware of any potential fees or additional costs that might be encountered. But with a bit of preliminary research and discussions with your realtor, you can be sure that you’ve put enough money aside so there are no last-minute surprises during the purchase process. Prior planning prevents poor performance! Let me help take the stress out of the process. Call me today!