Canadian Guide to Mortgages:Home Buying Costs You Need to Know About
In the last video, we went over the calculations you need to do to determine how much you can afford to pay each month for your mortgage payment. Now you need to make a downpayment.
A downpayment is simply the money you pay out-of-pocket towards the price of your home. The remainder amount that you need to borrow is the mortgage amount.
Coming up with the downpayment may be your biggest challenge. If you make a downpayment of at least 20% of the purchase price, you can get what is called a conventional mortgage. If you have less than a 20% downpayment, you will need to get a high ratio mortgage. A high ratio mortgage loan must be accompanied by mortgage loan insurance. This insurance protects the lender. If the borrower defaults on the mortgage, the lender is paid back by the insurer.
There are three main providers of this insurance: CMHC, Canada Guaranty, and Genworth Financial Canada. Don’t know which provider to go with? Not to worry. Your mortgage broker will arrange the mortgage loan insurance for you.
The premium for mortgage loan insurance depends on the size of your mortgage loan. It’s usually added it to the principal amount of the mortgage, or you may have to pay for it upfront, along with your other closing costs.
Unless you have an inheritance or generous relatives, getting your downpayment together will mean a lot of saving, planning, and budgeting. But it’ll be worth it. The more you put down, the more that you’ll save in the long-run because you’ll end up paying less in interest. If you don’t have quite enough to make a downpayment, try getting on a savings schedule where you can set aside a percentage of your gross income each year and you’ll be on your way.
If you’re a first-time home buyer, you can take advantage of the Canadian Federal Government’s First-Time Home Buyers Plan. It allows first-time homebuyers to withdraw up to $25,000 per spouse, from their RRSP accounts. Normally, if you make a withdrawal from your RRSPs, that amount is added to your annual income, and you will have to pay income tax on it. But under the First-Time Homebuyers Plan, you can take up to $25,000 without tax liability. Basically, you’re borrowing a tax-free, interest-free loan from yourself. All you need to do is pay back the full amount within 15 years.
But before you cash in your RRSP to buy a home, weigh the pros and cons carefully. Is it worth it to give up the advantages of long-term compounding interest on your RRSPs? Can you afford the RRSP payback requirements? If you can get a low mortgage rate and your investments are paying a relatively low rate of return, then financing your home with RRSPs may be a wise move.
Keep in mind that there’s more to buying a home than just the downpayment and the mortgage. You will need to budget another 1-1/2% to 4% of the price of your home for extra costs. Your mortgage lender may ask you to pay for a recognized appraisal, in order to complete a mortgage loan. Having an independent appraisal done on the property before you make an offer is a good idea. They’ll tell you what the property is worth and help insure that you’re not paying too much.
A home inspection is always a good idea, but especially with resale or older homes. Home inspectors check plumbing, electrical work, and any structural flaws. It can cost anywhere from $150 to $500, depending on the size of your home. When you’re looking for a home inspector, make sure you get his or her credentials and ask your realtor for an experienced professional.
Lenders will want proof that the property complies with all development bylaws and that new additions, decks, or fences fall within property boundaries. This information can be found with a survey. If the seller has a recent survey, the lender might accept it and you could save yourself some money. If the survey is more than five years old, or if the seller doesn’t have one, you’ll have to pay for one yourself.
If you’re obtaining title insurance, it may be an acceptable alternative to a survey. Title insurance is an insurance policy you can purchase to protect your investment in the property if there’s a problem with the title. Just ask your mortgage broker for more information about title insurance.
If the home has a well, you’ll want to have the quality of the water tested to ensure that the water supply is adequate and that the water is drinkable. If the house has a septic tank, it should be professionally checked to make sure that it’s in good working order. You can negotiate the cost for both of these with the vendor, and list them in your offer to purchase.
Depending on the province you live in, you may have to pay a land transfer tax. The cost is a percentage of the property’s purchase price. In some provinces, if you’re a first-time home buyer, you may be exempt from the land transfer tax, which can cost up to a few thousand dollars. Check with your lawyer or notary to find out more.
Property taxes are charged by the municipality where the home is located, and are based on the value of the home. If you’re buying a newly-constructed home or a condo, you’ll have to pay GST. Some lenders will require you to have property insurance, but even if it’s not a requirement of your mortgage loan, it’s a good idea to protect your property.
Property insurance covers the cost of replacing your home and its contents, in case of a fire, earthquake, flood, or other damage. Property insurance must be placed on closing day.
The job of your lawyer or notary is to go over all the paperwork and protect you from real estate fraud or other legal issues that could stem from a property purchase. They’ll charge you a service fee for things like conducting title searches, lien searches, and facilitating the transfer of title. Usually, the legal fees are paid on closing day and can range from $300 to $1,000, depending on the services you need.
Closing and adjustment costs are expenses for any necessary adjustments to be made between you and the seller. If for example, the seller prepaid property taxes or condo fees, you’ll have to reimburse them. Depending on your situation, you may have other initial expenses to consider. These could include moving expenses, renovations or repairs, condominium fees, service connection fees for telephone, gas, electricity, cable or satellite, and internet, appliances, and gardening or snow clearing equipment.
Use the home purchase cost estimate form next to this video, to help you figure out your estimated upfront costs. And now that we’ve reviewed all the extra costs that can be involved in a home purchase, you’re ready to move on to the next step.