Saving to buy a home is more than just putting together a down payment. Even though the down payment gets all the focus and planning, there are additional costs you'll incur and need to cover. We walk you through those other costs and fees, allowing you the opportunity to both plan for them and more importantly not be surprised by the actual amount needed to pay for them.
Experts estimate that you should budget anywhere from 1.5% to 4% of the property purchase price for closing costs and other related expenses. If you live in an expensive province like BC and a city like Vancouver or Victoria that's a lot of extra money you may not have planned for.
Costs Before Closing
You will need to budget for these costs in addition to your down payment. They are incurred during the mortgage approval process, prior to you removing conditions and committing to purchase the home legally.
Home Inspection Fee
A home inspection reduces the chances of any unwanted surprises related to the condition of the property. A home inspector will go over the house and provide a detailed report about the condition of the home, covering the roof, the foundation, and everything in between. The cost for this service starts around $300 and goes up from there depending on the size & scope of the project.
Mortgage lenders require home appraisals to ensure the fair market value of a property, as well as the overall condition & marketability of the property. This is different from a home inspection, as the appraiser will be considering the value of the property rather than the structure. The bottom line is that all financial institutions want to confirm the property value supports the loan to value they are basing their lending on.
An appraisal is typically not ordered for insured mortgages (those with a down payment of less than 20%), as the insurer has access to their own automated valuation systems which can determine the value internally. However, a full appraisal may be required if the property has unique features or there is limited comparable data for the mortgage insurer to rely upon. Additionally, if the property you're purchasing has a rental suite and the rental income from this suite is being relied upon for your application, lenders will normally want confirmation of economic rent; an appraiser can provide this as part of a full appraisal or as a stand-alone economic rent letter. If the insurer requires a full appraisal they will cover that cost, but if an economic rent letter is required you would pay for it.
For purchases with more than 20% down, lenders will typically want an appraisal – especially if there is rental income involved. The cost of appraisals usually starts around $300 and goes up from there depending on complexity. For an economic rent letter you can budget between $150 - $250.
The good news is that this isn't additional money you need to save for, but you will need to have access to these funds upon the final subject removal for your accepted offer to purchase the property. There are no 'hard & fast' rules about the amount of the deposit: the final number is something that will be mutually agreed upon by you and the seller through your respective realtors.
This deposit is normally placed in trust with your realtor's real estate firm until the closing of the sale, at which time it is forwarded to the solicitor acting on your behalf. The solicitor will apply your deposit towards the total down payment. Keep in mind that when you make an offer, it's a contract and if the sale fails to close (due to your part), the seller may not only be entitled to keep the deposit as compensation but could also sue you for breach of contract for any damages.
Closing costs are expenses that must be paid at the time the sale closes and the title of the property is transferred to you. The usual closing costs you should be prepared for are:
You will need a lawyer – or a notary in B.C. – to help finalize the sale, prepare the mortgage documents, and protect your interests. Fees will include the lawyer's time and disbursements incurred during the transfer of the property. When obtaining quotes from lawyers it is a really good idea to get an "all in" price which includes all fees, disbursements, and taxes, thereby ensuring you are comparing "apples to apples" when it comes to this cost. You should be budgeting between $1500 - $2500 for this expense. Once again, the complexity of the transaction (both in terms of the property & mortgage requirements of the lender) will dictate the final amount.
Land Transfer Tax
Most provinces (except for Alberta and Manitoba) collect a land transfer tax, and the amount varies by province and the value of the property. If you're purchasing property in B.C., you can use the provincial website to estimate the amount you will need to set aside.
There are a couple of property transfer tax exemptions for B.C. residents at the time of writing this blog:
- first time home buyers are exempt from property transfer tax up to a purchase price of $500K, with a partial exemption from $501K - $524K
- buying a brand new home up to $750K provides a full exemption, with a partial exemption for a purchase price between $751K - $799K.
For example, let's say you are a B.C. resident and wanting to purchase a used home for $600K. At the time of closing you would need to come up with $10,000 to cover the property transfer tax, which is no small sum. It's always best to double-check your provincial government website for up-to-date rules & exemption details.
The mortgage lender may require you to have title insurance as protection against losses of a property ownership dispute, should there be one. Your solicitor will take care of obtaining this insurance for you. The cost is dependent on the property value and will consider any unique factors with respect to the property. Normally this falls within the range of $200 - $500. When you are discussing costs with lawyers, ask whether they are factoring this amount into the total costs they are quoting you.
Property Tax Adjustments
Both the buyer and seller are responsible for paying property taxes for the portion of the year that they own the property. If the seller has pre-paid taxes for any months after the sale date, you will need to reimburse the seller for those costs.
For example, in BC you pay your property taxes in July for the year ahead. Let's say that you purchase a home in December; your solicitor will do an adjustment at closing, charging you and reimbursing the seller from December to July of the next year as they had already paid this amount. Your solicitor will advise you of this figure prior to the mortgage signing meeting.
Depending on the payment schedule for your mortgage, the closing date of the sale may not be the date of the first mortgage payment. Interest accrues on the mortgage principal from the date the funds are advanced to the date of the first payment.
For example, let's say your sale closes March 16th and you set your payments to come out at the first of every month. Unlike rent, mortgage payments cover the previous month rather than the month ahead, so your first regular payment would be on May 1st (for the period of April 1st to May 1st). However, the lender advanced you the funds on March 16th so they would also want to collect the interest from then to April 1st (interest adjustment) – like a "catch up" payment. After this is paid, your payments would fall on the first of every month with the first full one being on May 1st. Again, your lawyer will let you know this amount prior to the mortgage signing meeting.
Some Other Final Costs To Consider
Most smart buyers will have worked out a budget to pay for the monthly expenses of owning a home, including their mortgage payments, property taxes, and utilities. For some there may be additional costs such as homeowner association dues (strata fees) and/or water & septic tank testing and maintenance (applicable more in rural properties), which will vary according to the type of property and its location.
There are also the costs associated with moving, hook up & connection fees for utilities, possible renovations, immediate landscaping, and maintenance which may be required to make your new property feel like home.
Just when you thought it was all over and safe to look at your bank account again, there are a couple of other costs that tend to pop up either right before possession or in the first month of homeownership:
Mortgages with less than a 20% down payment must be insured through a high ratio mortgage insurance provider, such as Canada Mortgage and Housing Corporation (CMHC), Sagen (previously known as Genworth), or Canada Guaranty.
You can opt to pay this money upfront or include it as part of the mortgage. Paying it upfront yourself will save you thousands of dollars over the long run, as you are not paying interest on this money since it has not been added to the mortgage. However, for most folks coming up with thousands more at the time of your purchase in addition to all the other costs is nearly impossible.
How much are we talking about? As an example, if your down payment is 5% of the purchase price the mortgage insurance premium is 4% of the mortgage amount. So if your mortgage is going to be $400K, the mortgage insurance (4%) will add up to $16K.
If you are worried about the added interest cost, by taking advantage of the generous pre-payment privileges most lenders offer these days you can effectively reduce the added interest by making additional lump sum payments towards your mortgage principal whenever you are able to do so.
Finally, lenders require that all mortgaged properties be insured against fire and other damage (i.e. flood, earthquake, etc.). Your lawyer will need to provide confirmation to the lender that the home is adequately covered against any & all reasonable calamities. The cost of home insurance is really property specific, with pricing driven by value, risk, and your claims history. To get an idea of what the cost is likely to be, reach out to a few insurance companies in advance of purchasing and run the type of property you are interested in past them to get an idea of what you should be budgeting for.
There you have it! As you can see, these extra costs can really add up quickly and before you know it you're setting up a lemonade stand in front of your new place to pay for it all. For a $420,000 property 1.5%-4% translates into $6,300 to $16,800. That is why preparing for these costs is vital and doing so will keep your stress levels much lower since you will know what you really need to save. This holds true whether you are a first-time buyer or have purchased in the past.
When you choose to work with the Auxilium Team, we take all these costs into account when calculating what you can afford. If that sounds like the service you want for your mortgage financing, start a conversation with us today. Fill out our contact form or give us a call at 250-590-6520 (toll-free 1-855-590-6520) to see how we can find the best solution for your situation.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.
This post reflects the best available information at the time of writing/last update. In order to ensure that you have the most up-to-date information, contact us to confirm the details for your specific situation.