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Beyond your down payment: Preparing for closing costs
December 4, 2020 | Posted by: Andrew Wade
Beyond your down payment: Preparing for closing costs
There are some expenses that come up before you make the down payment.
Home inspection fee
When making an offer on a previously owned home, a home inspection is often a condition of the offer. A home inspector will go over the house and provide a report about the condition of the home. Costs for this service will vary but you should plan for $300 minimum.
Deposit
You will need to give the seller a deposit when you make an offer on the property. Once the offer is accepted, the deposit is placed in trust until the closing of the sale and is applied toward the down payment. So, this isn’t additional money you need to save, but you will need to have the funds ready. Remember, making an offer is looked at as a contract of sorts. If you are the reason the sale fails to close, the seller may be entitled to keep the deposit as compensation.
Appraisal fee
An appraisal estimates the fair market value of a property. A financial institution may want an appraisal of the property to ensure the mortgage is not worth more than the property. An appraisal is not usually required for insured mortgages (those with a down payment of less than 20%), but, according to CMHC, a professional appraisal may be required if a more in-depth assessment of the value of the property is needed. An alternative lender, like Bridgewater Bank, specializes in uninsured alternative mortgages, which means you provide a minimum 20% down payment and an appraisal.
Closing costs
Closing costs are expenses that must be paid at the time the title of the property is transferred to you. Here are the typical closing costs you should be prepared for:
Legal Fees
You will need a lawyer 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.
Land transfer tax
Most provinces (besides Alberta and Manitoba) collect a land transfer tax, and the amount varies by province and the value of the property. You can use a land transfer tax calculator to estimate the amount you’ll need to set aside. In B.C. it is 1% of the first 200k and 2% of the balance up to 3 million where it goes to a full 3% of the purchase price.
Title InsuranceProperty Tax Adjustments
The lender may require you to have title insurance as protection against losses of a property ownership dispute, should there be one. Typically around $350.
Property Tax AdjustmentsInterest 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 cost .Typically the tax is due at the beggining of July so you prepay until December for the year its due. The fun part is when we have closings around July for the lawyer to fiugure out the statement of adjustments to get each parties amount payable and whether the buyer is to repay the seller for their portion of the years taxes.
Interest Adjustments
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 mortgage funds are advanced to the date of the first payment date.
Other homeownership costs to consider
Most home buyers will have worked out a budget to pay for monthly expenses, such as their mortgage payments, property taxes and utilities. There may be costs such as homeowner association dues or septic tank testing and maintenance, which will vary according to the type of property and its location. There are also costs associated with moving, connection fees, renovations, landscaping, and purchases to maintain your home.
You may not be aware of the extra costs associated with things that tend to pop up right before possession or in that first month of homeownership. Here are two costs that you will need to be prepared for:
Mortgage Insurance
Mortgages with less than a 20% down payment must be insured through a high ratio mortgage insurance provider, such as Canadian Mortgage and Housing Corporation (CMHC) or Sagen (previously known as Genworth). You can opt to pay this money upfront or include it as part of the mortgage. Paying it upfront costs less over the long run because if it is added to the mortgage, you will pay interest on it. As a side note, if the purchase is in a province with PST, the PST on the insurance must be paid upfront.
Home Insurance
Lenders require that all mortgages be insured against fire and other damage. You will need to purchase home insurance and provide proof to the lender.
Plan for closing costsThere are several closing cost calculators available online to help you plan for the additional costs that will apply to your situation.
All of these extra costs can add up to thousands of dollars. Consider that 1.5% to 4% of a $400,000 property is $6,000 to $16,000. So, preparing for these costs will keep your stress lower, and you can plan for the amount you really need to save. This is especially true for first-time homebuyers who have never been through the mortgage process. Typically the lender will want to see you have 1.5% of the purchase price saved for closing costs for your purchase but we can get the solicitor to draft a statement of adjustments for the actual closing costs applicable, especially if you are a first time homebuyer and don't have property transfer tax!
There are several closing cost calculators available online to help you plan for the additional costs that will apply to your situation.
Work with your mortgage broker
Your mortgage broker is there to support you and help you navigate the journey to homeownership. Please ask any questions you have so you feel you understand the steps in purchasing your property.
This article was brought to you by our friends at Bridgewater Bank!
Andrew Wade
