Ownership/Purchasing Costs – Do You Know What to Expect?

By: Terry Hoda

Determining how much you can truly afford involves meeting with a mortgage representative at a financial institution. Most financial institutions, as well as Canadian Mortgage Housing Corporation, have online mortgage affordability calculators that allow you to plug in your basic numbers to see how much of a loan you might qualify for.

Consider these calculations an estimate — a mortgage representative will take your preliminary calculations and see if they hold up to further scrutiny. It’s important to be honest with yourself when you do your own financial review. If you underestimated your household expenses to make your financial picture look brighter than it actually is, your mortgage representative will probably expose a more realistic view.

The mortgage representative will then come up with some close-to-final numbers, presenting you with a preliminary figure for pre-approval. Now you should prepare a thorough and realistic checklist of your current household budget, say, if you’re renting an apartment and your expected budget in your prospective new home. You’d be surprised how some new items — such as additional insurance or costs for general repairs — can add to your expenditures as a homeowner. Make sure you take all of these items into consideration when calculating your mortgage affordability.

The importance of not overspending 

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Real estate experts cite overbuying as one of the most common mistakes first-time home buyers make. Whether they got caught up in a bidding war or fell in love with a home they just had to have, many people spend more on their new home than they can afford. Months later they may realize that their purchase has left them “house poor” with no money left to contribute to savings, other necessities, or even rainy day funds. This further underscores the need to be honest and realistic with your mortgage calculations, as well as the importance of getting pre-approved for a mortgage, since it can actually protect you from going overboard.

Costs of Home Ownership 

From deposits to moving expenses, and everything in between, buying your first home involves more than just saving for a down payment. That may be the largest cost, but there are other things you’ll need to plan and budget for.

Deposit

This is the step you take when you’re ready to make an offer to purchase. Let’s say you’ve viewed a selection of properties with your agent, found one you like, and are ready to get serious about purchasing the property. At this point, you might need to put down a deposit; the amount depends on your area, the purchase price of the home, and your situation. If a deposit is required, it will be held in trust and will be deducted from your total purchase price and is considered part of your down payment.

Down payment

Generally speaking, the larger a down payment you’re able to make, the better, because that means you’ll have to borrow less. But you also don’t want to leave yourself so cash-poor you can’t cover all of the other costs that come with closing a sale.

Mortgage loan insurance

If your down payment is less than 20% of the purchase price of your home, you are required to have mortgage loan insurance, also known as high-ratio mortgage insurance. It protects your lender — not you — in case you default on your mortgage. Premiums are calculated as a percentage of the amount you put down, changing at the 5%, 10% and 15% thresholds but there is no break for anything in between. Premiums range from 0.5% to 3% and increase if you are self-employed.

Land transfer tax

Most provinces have such a tax, though it may have a slightly different name (such as property purchases tax), and the rates vary. Alberta, Saskatchewan, and parts of Nova Scotia do not have Land Transfer Tax (LTT) at all, while other provinces use a tiered system. In the tiered systems, the rate varies depending on the purchase price of the house. Your RE/MAX agent or your lawyer can advise what the rate would be for the area you’re considering buying in.

Appraisal fee

Your mortgage lender will likely require an appraisal to ensure the property is worth what you are offering. The reason is two-fold: it prevents you from borrowing more than a property is actually worth, which might apply in cases where multiple would-be buyers enter into a bidding war; and it protects the lender from lending out more than the home’s value, which becomes critical should you default on the mortgage. If a lender has to foreclose, they want to be able to recoup the entire loan amount, as well as the costs of foreclosing. The fee for such an appraisal is typically between $250 and $350.

Home inspection

You wouldn’t buy a used car without having a trusted mechanic perform an inspection for you, and a house is no different. Don’t even think about buying a home without first having a proper inspection done. In fact, your lender may insist on one to verify the condition of the home.

Property insurance

Your mortgage lender will require you to have property insurance in place on closing day. Since the property is actually the security against the loan amount, the lender wants to make sure insurance is in place to cover the cost of replacing the home, and its contents, should something happen.

Mortgage life insurance

Mortgage loan insurance should not be confused with mortgage life insurance, which protects you in the event something happens to you. This type of insurance might be suitable for a young couple or family where there is only one breadwinner, for example. Costs are usually much cheaper than loan insurance. Obtaining life insurance instead of mortgage life insurance is the best bet.

Legal fees

Legal fees for buying real estate range in price, depend on your situation, and must be paid upon closing. When purchasing brand new condos, since such deals can involve more paperwork, the cost might be higher. Your RE/MAX agent can provide you a local lawyer if you don’t already have a relationship with one.

Moving expenses and services connections

When you’re totaling up all the costs of buying your first home, don’t forget to include moving expenses and connection fees or deposits for services, such as phone, electricity, and other utilities. Make sure you call well in advance to make these arrangements, and ask about all associated fees. For example, some utility companies require deposits, or charge other fees for new customers with whom they have no billing history.