I love surprises. Well, no, that’s not entirely true. I love nice surprises, preferably the ones wrapped in a sizeable box with my name on the card and a smiley face on top.
What about the ones that aren’t as welcoming, such as hidden costs associated with buying a home? In today’s post, I highlight my top 3 surprised/hidden costs that often catches buyers off guard.
“Hidden Cost #1: Mortgage Default Insurance”
If your downpayment is under 20% and you’re obtaining a loan from a federally regulated financial institution, you’ll need to obtain mortgage default insurance.
So what exactly is it? It’s essentially an insurance policy designed to protect lenders in the event you default on your monthly mortgage commitment.
At the time of this writing, costs range from 2.8 to 5% of the purchase price, plus HST, and is only available on purchases under 1 million dollars.
Thankfully, you don’t have to pay this entire amount upfront. The total figure could be rolled into your mortgage and paid monthly through your financial institution.
Currently, there are three providers of mortgage default insurance throughout Canada. The first is the Canada Mortgage and Housing Corporation (CMHC), a crown corporation under the federal government.
Canada Guaranty and Genworth Financial are the remaining two. Most mortgage lenders will have a working relationship with all three.
“Hidden Cost #2: Land Transfer Tax”
Don’t let the name fool you, this is not a tax on land but on just about every type of real estate purchase imaginable, including houses, condos and commercial properties.
Land transfer tax rates will vary from province to province. In Ontario, the range is between 0.5-2.5% of the purchase price.
Unlike mortgage default insurance, the amount must be paid in full, prior to the title of the property changing hands.
If you’re a first-time buyer, there are some subsidized programs that reduce the overall cost, up to a maximum purchase price.
These figures change from time to time, so check with the provincial government’s ministry of finance website for the most up to date figures.
“Hidden Cost Number #3: Legal Fees”
Yep, you do have to pay your lawyer to comb through the details of a real estate transaction. Legal fees will vary from lawyer to lawyer, depending largely on the level of complexity involved in the purchase transaction.
I’ve seen fees range from the mid $700’s to beyond $1,200. Be sure to get an estimate from the beginning and find out what services are included and excluded. Payment is usually due upon the completion date of your purchase.
And that’s a wrap, my top 3…
Well, okay not quite.
I couldn’t end this piece without
are a few honorary mentions, keep reading.
If you’ve placed an offer on a home and it was accepted, a deposit is usually due within 24 hours of that date and time. While there isn’t a specific amount required, in practice, 3-5% of the purchase price has been the conventional range.
Personal cheques are rarely accepted so be sure to request a draft or certified cheque from your financial institution.
This should be obvious, I know. But, because moving is the last step on the ladder, it’s often overlooked as a cost that will somehow, umm, take care of itself..? Yes, I’ve heard those exact words.
I recommend you take the opposite tact. Put aside these funds right from the beginning. It can be a little unsettling to discover that after your budget has been divided up, you don’t have enough funds to cover the actual move.
Depending on the scale, distance between locations, and whether you’re doing it yourself, I would recommend a minimum budget of around 0.75% of the purchase price.
If you’re moving into a 1 bedroom, 500 square foot condo, you may not need that much, however, it’s always better to be over-prepared than under.
Ask your Realtor, friends or colleagues for referrals, then, begin contacting several companies for quotes. Be sure to also find out the types of insurance protection available for your items during transit.
Appraisal & Title insurance
Lenders may request an appraisal on the home you’re buying, as a condition of issuing a mortgage.
A certified appraiser approved by the lender, carries out this service and, upon completion, provides a detailed report directly to the lender. Buyers bare the cost in most cases. Fees will vary from $350 and up, depending on the size of the property and its location.
The last honorary mention is Title Insurance. Some lenders will require this type of insurance policy as part of the mortgage contract. Title is a legal term defining who owns land or property. When a purchase is made, the title of the house or condo is transferred to you. Title insurance protects the buyers and lender against against potential losses including:
- survey issues
- title fraud
- problems with the title on your property
- challenges to the ownership of your home
Costs range between $150 and 350 and is a one time payment, based on the value of the home you’re purchasing.
In the words of GI Joe, one of my favourite childhood cartoons, “and knowing is half the battle.”