Buying or selling a home is never an inexpensive proposition. There are numerous players involved in most real estate transactions, and they all look to be compensated for their efforts.
Buying a home
The biggest cost of buying a home is usually coming up with the down payment. There are a couple of programs available that allow you to buy with no money down, but the majority of you will need to have a down payment of at least 5% of the purchase price. An important point to remember is that, if you are buying a home that is valued at more than $250,000, you will need to have a down payment of at least 10%.
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If you have a down payment of less than 25% you will usually need your mortgage insured by Canada Mortgage & Housing Corp. or GE Capital. Both companies have the same fee structure: a $165 application fee and an insurance premium based on the size of the mortgage and the size of your down payment.
With 5% down your premium will be 3.75% of your mortgage amount, plus 8% provincial sales tax in Ontario (i.e. $3,750 for a $100,000 mortgage plus $300 PST). The bigger your down payment, the lower your premium. With 10% down the premium drops to 2.5% of the mortgage amount, and with 15% down the premium drops to 2% of the mortgage amount.
The only good thing about these costs is that you do not have to pay the insurance premium out of your pocket. It can be added on top of the mortgage. (You will have to pay the application fee on closing.)
The other big expense is land transfer taxes. Most provincial governments want a piece of the action; each has a different fee, but it is still a tax grab. In Ontario you will pay one-half of 1% for the value of the property up to $55,000. Then you will pay 1% on properties valued between $55,000 and $250,000 (less $275). For properties valued between $250,000 and $400,000 you will pay 1.5% (less $1,525). On purchases over $400,000 you will pay 2% of the purchase price (less $3,525).
Most people will want a home inspection. The cost will vary based on the size of the house and the home inspector you choose, but expect to pay $350 to $450. Your lender may require an appraisal. In most urban areas, you can get an appraisal for $175 (plus GST), while rural properties can cost $250 to $300.
Lawyers will typically charge you a fee for their time, plus disbursements, which include photocopying, faxing, couriers, title searches, execution searches, title insurance, document registration, etc.
More and more lawyers use title insurance to minimize the searches they do. An average title insurance policy is about $270. This can help reduce the disbursement portion of your bill and may also eliminate the need for a new survey of the property, which could cost $1,000 and up, depending on the location and size of the property.
Lawyer fees vary widely. There are many real estate lawyers who thrive on volume and offer reasonable rates. Others charge substantially more. Budget between $1,250 and $1,750, but get a quote before you hire anyone. I have seen some people pay double these prices for the same work.
Another area that may come as a surprise will be the closing adjustments. If the vendors prepaid the property taxes, you will have to reimburse them at closing. If your bank is paying the property taxes for you, they may ask for a tax holdback equal to one-third or one-half the annual property taxes. You can avoid this paying property taxes yourself.
If you use a mortgage broker, you will not usually have to pay a fee, since they're paid by the bank funding your mortgage. But if you have a unique situation due to a bankruptcy, a poor credit history, lack of provable income or maybe a unique property, the broker might charge a fee. This should be disclosed before you sign a commitment to enter into the mortgage. The fee will vary based on the size of the mortgage and the degree of difficulty involved in arranging the financing.
You will need homeowner's insurance (a requirement of any mortgage). Expect to pay $350 to $500 per year for this policy. Another cost is for utility hook-ups. Most charge a set-up fee.
Selling a homeThe biggest cost in selling will usually be the real estate commissions, which vary based on the location of the property and the competitiveness of your local market.
Most urban areas are very competitive, and you can usually find a good realtor to list your home for 4.5% or 5% of the sale price. In rural areas, the costs are usually higher due to lack of demand and lower housing prices. And you pay GST on the commission!
You might face a penalty to break your current mortgage. This will vary based on the size and terms of your mortgage, but most institutions charge a three-month interest penalty or an interest rate differential, whichever is greater. They will also charge an additional $150 to $250 to prepare your discharge statement.
You will need a lawyer. The costs are not as onerous as when buying; $1,000 is usually more than enough, but be sure to shop around.
You will usually need to hire movers or rent a truck. Be sure to arrange this early on and be sure to leave yourself lots of time to move your stuff out of the house. You should plan on being out of the property by noon on your moving date.
Far too many people try to save a few dollars by telling their movers not to show up until the afternoon. The gentleman (and I use the term loosely) I bought my house from called his movers on the day of closing and told them to not come until later in the afternoon because he didn't want to pay them to wait around at the new house until he got the keys. (His lawyer told him, on the day of closing, that he might not get his keys until 4 p.m. or 5 p.. in the afternoon because the registry office was swamped with closings.)
His movers decided they would save him even more money and just didn't show up, which left him scrambling to find a truck on a Friday night at the height of moving season. Needless to say, I was not impressed when I showed up with my truck and found him and all his belongings still in the house.
Buying and selling
If you are buying and selling a property, chances are that both properties will not close on the same day. You will usually have to arrange bridge financing on your current home. Most bridge loans will cost between $250 and $500 and include interest at prime plus 2%. The bridge loan allows you to use the equity in your current home to buy the new property. Keep in mind that the bridge loan has to be repaid from the sale of your current home.
Buying or selling a home is not a cheap proposition. The best advice I can give is to be prepared well in advance. There is nothing worse than surprises on closing day.
Andy MacDonald (BA Econ.) is president of MortgageBroker Inc. He has more than two decades of financial services experience and has long been an advocate for consumers within the mortgage industry. Visit his Web site at MortgagesInCanada.com.
