Published: August 17, 2020 • Last updated: September 25, 2020 at 9:54 am
How Do You Ensure Your Homebuying Budget Covers Everything You’ll Need For Closing Day?
Once they have an accepted offer, most buyers are preoccupied with coming up with their down payment. As they should. It’s a big number and you need to be able to deliver and also prove the source of these monies. But there are actually several other items requiring your attention too; these are called your closing costs.
Closing costs are not the same for everybody. They can vary considerably depending on factors such as :
- The purchase price itself
- First-time buyer or repeat offender
- High rise or house
- Rural or urban dwelling
- New from the builder or resale property
First-time buyers are sometimes not aware of all possible closing costs – understandably so, because they have not been through the buying process before.
I am talking about items your lawyer will ask you to pay for when you attend their office (in person or virtually) to sign the mortgage documents. So technically the cost to hire a moving company is not a closing cost – but you’d better budget for that too! And if you already know you are going to paint your new home as soon as you take possession, that expense also needs to be budgeted for.
What Are The Top 10 Closing Costs?
The top 10 costs you need to budget to bring with you to close your home purchase are (click on the list item to go directly to the detailed explanation):
Land Transfer Taxes
Unless you live in Alberta or Saskatchewan, where they charge a flat fee, your province will charge a one time tax which is a percentage of your purchase price. The more expensive your home, the larger this tax. You can use this calculator.
If you are a first time home buyer, you are eligible for rebates in PEI, B.C. and Ontario, and also from the City of Toronto, who are unique in that as a municipality they also charge a land transfer tax on top of the Ontario tax. The calculator will factor any eligible rebates for you.
Legal Fees and Disbursements
Your lawyer will quote you a fee for service – for example, $950. However, when you receive your final statement of account the amount owing will be several hundred dollars more than this.
The law office will provide a break down of these additional expenses, which include Lender Title Insurance, Buyer Title Insurance, search Fees, courier costs, fax charges, photocopies, execution certificates, bank charges and more.
And don’t forget HST, where applicable.
Mortgage Default Insurance (MDI)
If your down payment is less than 20% of the purchase price, you must purchase mortgage default insurance (MDI) to protect your lender in case you fail to maintain your mortgage payments.
There are three mortgage default insurers:
- Canada Guaranty (private insurers)
- Genworth (private insurers)
- CMHC (Canada Mortgage and Housing Corporation)
In the same way, consumers refer to paper tissues as Kleenex, or photocopies as Xerox copies – Canadians tend to refer to “mortgage default insurance” as CMHC insurance. CMHC is the Federal Government’s national housing agency. But you can no longer consider the three insurers as interchangeable, as CMHC in recent months is positioning itself more of a lone ranger.
How much are we talking about for MDI?
Well, if your down payment is less than twenty percent of the purchase price, this one-time MDI premium is 4% of the loan amount. So imagine a scenario where you buy a home for $500,000 with a minimum 5% down payment. Add in the MDI premium and you are financing 99% of the purchase price!
Pretty much everyone just adds this MDI premium to their core mortgage balance and repays it over the life of their mortgage. So technically, the MDI premium is not an incremental closing cost.
In the scenario below we are going to explain how MDI and PST are calculated/allocated when buying your home.
Provincial Sales Tax on MDI
Important! You MUST pay PST on the premium, and that MUST come from your own pocket and cannot be added to your mortgage.
Suppose you want to buy a $900,000 townhome in Vaughan with a $65,000 down payment. Note that if you are going to put less than 20% down payment on your home then you MUST have mortgage insurance.
- Which means your initial mortgage loan request would be $835,000 (Cost of home – down payment)
- Now you must factor in your insurance premium (4% of your initial mortgage loan amount) would then be a hefty $33,400
- BUT THAT’S OK – that $33,400 will simply be added into your total mortgage loan amount. It will be paid over time and included in your regular mortgage payment.
- So now your total mortgage loan amount is $869, 400(Mortgage loan + insurance premium)
Ok, so no big deal Ross, if I am going to treat the premium on top of my mortgage as a normal mortgage repayment over time, then where is my hidden cost?
Remember our first point?
You MUST pay PST on the premium, and that MUST come from your own pocket and cannot be added to your mortgage.
According to CMHC’s website, MDI premiums in Ontario, Quebec and Saskatchewan are subject to provincial sales tax.
If you live in Ontario, you will pay 8% PST on your insurance premium to your real estate lawyer, which in this case is an extra $2,672 you may not have planned for, and this you must pay out of pocket.
*8% (PST) of $33,400 (Insurance Premium) = $2,672*
PST Rates Across Canada:
0% – In the remaining provinces and territories, you do not have to pay PST on default insurance.
The Mortgage Interest Adjustment
Every mortgage has an interest adjustment date, which is the date from which your lender first starts calculating the normal regular interest you are going to pay.
Some lenders, such as TD Bank, prefer to collect from you on the first day of the month. And in this case, unless your purchase date is also on the 1st, there will be a partial month’s interest your lawyer will collect from you, to adjust things until everything aligns perfectly.
You borrow $869,400 with a five-year variable interest rate of 1.86%
- In this case, if your closing date was on August 13th, 2020 – your mortgage interest adjustment would be calculated from the 13th up until September 1st, 2020 (for your partial month)
- Your lawyer will collect an interest adjustment from you for the period from August 13th to September 1st.
That would be an extra $840.56 you may not have been expecting.
- Now your regular mortgage payment will begin on October 1st, 2020 for the full month period.
NOTE: This adjustment comes into play, whether you choose monthly, weekly, biweekly or semi-monthly payments.
Now other mortgage lenders, like MCAP and First Financial, will set your first payment exactly one payment period after your purchase completion date.
So, using the same sample from above, your closing date would be August 13th, 2020 and your first payment would be on September 13th, 2020 with NO interest adjustments.
Please note, neither way is wrong or right, they are just different and result in determining how much $$ you need on your purchase closing date.
If you would like more info on interest adjustment rates – check out our article https://askross.ca/interest-adjustment-date-explanation/ where we break it down for you.
Status Certificate Fee (Estoppel Certificate)
If you buy a condo or strata unit, in most provinces you will need a certificate from the management company which details the financial health of your condo corporation. The cost is typically around $100 plus applicable taxes. Not large, but it is essential to completing your purchase.
“The status certificate is a document, as per Section 76 of the Ontario Condo Act, that provides basic and essential information concerning the financial status of a unit and of the condo corporation. Its main focus is to inform a prospective owner of the fees, of any large increase that is going to come into effect, of any special assessment that is being contemplated by the board, and any arrears or lien that a particular suite might have.
In addition, it contains the condo declaration, by-laws, budget, reserve fund, insurance, management contract, rules, minutes of the last annual general meeting, and mention of any lawsuit involving the corporation. This certificate can run into one hundred pages.”
Land Survey Fee or Certificate of Location Cost
Per BMO, “if the seller cannot produce an up-to-date survey or certificate of location, you may have to pay for one before finalizing the mortgage loan. Title insurance may be accepted in lieu of a survey. The cost can range from $1,000 – $2,000, depending on the size and type of the property.”
These days, surveys are the exception rather than the rule – as title insurance works in most cases.
Prepaid Property Taxes
If the seller of the home you want to buy has prepaid their property taxes for the entire year, you’ll need to reimburse them for the period of time during the calendar year that they did not live in the home.
Prepaid Utilities and Condo Fees
Sometimes sellers prepay their utilities and even their condo maintenance fees If so, you will need to reimburse them for the unused portion.
New Home Warranty Enrollment Fee
Buying a home directly from the builder is a whole other topic NOT covered in detail here. Regarding specifically the New Home Warranty Enrollment Fee, the Tarion website provides some useful information. The Tarion enrollment fee is typically between $500 and $1,000, and it protects buyers from having to pay for any repairs due to builder error.
New homes are subject to GST or HST and also eligible for rebates https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4028/gst-hst-new-housing-rebate.html
When it comes to condominiums, in particular, there could be a number of additional costs. Please consult your real estate lawyer very early during the home purchase “cooling off period” to learn what they might be in your case.
Four Other Costs Associated With a Home Purchase
These are not closing costs which your lawyer will be looking for you to pay, but they are potential additional costs you might have to factor into your home buying budget. These items would typically be dealt with during the waiting period after your offer is accepted and before you meet your lawyer.
Often required by your mortgage lender – the price of a home appraisal varies depending on location, property type, and value. Most appraisals fall in the range of $300 to $500. Interestingly, if your down payment is less than 20%, you will rarely, if ever, be required to pay for an appraisal. You would have an insured mortgage where the insurer covers that expense.
“An appraisal is based on a variety of factors including the size and age of a home, the condition a home is in, the condition a property is in, a home’s features and amenities, the home or property’s previous sales price, the comparable final sale prices for other comparable homes, and more. A home’s appraised fair market value is usually different from a home’s sale price.”
Source: “How Much Will a Home Appraisal Cost In Ontario“, Justo Brokerage
Home Inspection Fee
With most home purchases, it makes sense to factor home inspection fees. You need to hire a professional, impartial, and independent inspector to ensure your home meets all of the health, safety, and living standards/guidelines. The price of a home inspection in Ontario can vary based on the home’s specifics. It’s good to budget $300 – $600.
For more information on home inspections in Ontario, follow this link.
Water Quality and Septic Tank Inspection Fees (Rural Properties)
If the home sources drinking water from a well, you will need to have the quality of the water tested to ensure the water is potable/healthy for human consumption. And if sewage is managed by a septic system, you might incur a Septic System Inspection Fee.
This is a very useful source of such information https://buildersontario.com/buying-house-septic-system
Miscellaneous Moving Expenses
From buying boxes and packing materials to booking a moving company, you will need to allocate funds for this very necessary part of the purchase process.
As you can see, there are many things vying for your wallet’s attention when you buy a home. Don’t wait till the last minute to figure out how much they will be. And always build in a contingency for things that invariably come up in spite of all your careful planning.
Your real estate lawyer, mortgage broker and real estate agent are all excellent sources of information about the property you plan to buy. Don’t be afraid to ask!
First Time Buyer Who Needs a Mortgage?
Looking for a first-time home buyer mortgage? Search no further. First-time buyers are one of our favourite client types. From easy pre-approvals to low down payments and great rates, Ross Taylor & Associates will take care of you through your home buying process. If you’re ready to make the move, or have any questions at all, ASKROSS how he can help.
Just Beginning Your Journey To Home Ownership?
Congratulations — You’ve already started on the right path by researching all the costs that you need to be aware of. To help you through all the other steps, I strongly recommend downloading our free comprehensive ASKROSS First Time Homebuyer Guide. It provides detailed information on everything you’ll need to know, from finding a realtor, to knowing what you can afford, to mortgage pre-approval, to making your offer, right through to closing and moving in to your new home.
- Mortgages 101 — What You Need to Know Before Applying For a Mortgage
- High Ratio Mortgages Explained
- Mortgage Pre-approval In Canada. What It Is & How To Get It
- As a First Time Buyer, How Can I Use My RRSP As Part Of My Down Payment?
- First Time Buyer Government Incentives
- First Time Homebuyers: Everything You Need To Buy Your First Home In Ontario