The Hidden Costs of Buying a Home
Michelle Hopkins
REW
Look for green links to grants and rebates.
Like most first-time home buyers, Kimberly Macdonald had a wish list of what she wanted in a new home. Although affordability was an important consideration, she also wanted a location close to family and friends, an outdoor space she could entertain in and hardwood floors.
She got all that in her new condo. What she didn’t get was a series of nasty shocks to her bank balance.
Many first-time buyers are so excited about finding a home with everything on their wish list, they don’t realize that they’ll face a host of costs beyond the purchase price.
“We often enter into the single biggest purchase of our lives without a clear plan, research or budget,” says Gordon Bennett, a partner/lawyer at Bennett & Parkes. “I recommend that people inform themselves about everything that buying a home entails.”
Macdonald says she did her homework well in advance of searching for her new home.
“I’m very detail oriented, so I spent a lot of time researching what my costs would be and what I needed to do to close on the deal,” says Macdonald. “When it came to what fees I was going to have to pay, I found my two best resources were my Real Estate Agent and my bank. My best advice is to ask lots of questions, because you don’t want any surprises.”
Once you’ve made the decision to buy a home, the financial adventure begins. Meet with your lender or mortgage broker to find out exactly what you can afford to spend. The first order of business will be to determine the amount of your down payment. You need a minimum of five percent.
A great place to start researching is on the CMHC website(Canada Mortgage and Housing Corporation). There is a calculator that helps you estimate the maximum purchase price and maximum monthly housing cost you can afford based on your gross monthly household income.
Generally the monthly cost of your mortgage, property taxes and home insurance should be no more than 28 to 32 per cent of your monthly gross pay. Some advisors suggest using that same percentage of your net income instead, so you’re not eating up all of your income with home expenses.
The lender then calculates what you can borrow based on the total of mortgage payment, property taxes, heating costs and any current debts you’re carrying.
Don’t forget that you’ll need to have cash available for when you want to make an offer. A deposit is usually anywhere up to 5 per cent.
Buying entails a number of extra costs. You may also be responsible for real estate commissions(if you’re selling as well as buying) and, on a newly built home, HST or GST (depending on when construction was completed). You may qualify for an HST or GST rebate .
If you have less than 20 per cent down payment, you will require mortgage default insurance, provided by CMHC, Genworth or Canada Guaranty. This can be paid up front or added to the monthly mortgage payments. It will cost thousands of extra dollars over the course of your mortgage, so if you can scrape together at least 20 per cent as a down payment, it will be well worth your while.
Even if you can put more than 20 per cent down, your lender will recommend that you buy insurance to cover the outstanding amount in case something happens to you. Insurance covering your mortgage is an excellent safeguard, but you’re better off to buy a term policy from an insurance company than the mortgage insurance your lender offers. An independent insurance broker or mortgage broker can explain why.
It’s worthwhile to pay for a home inspection to check for major issues. The inspection is usually in the $500 to $700 range. A home inspector may also recommend specialists if complicated problems are suspected.
As a buyer, you don’t pay your Real Estate Agent, but it’s important to have a lawyer or notary public to represent your interests and make sure the paperwork is all in order. You do pay for that. For straightforward transactions, a notary will charge $600 to $700 and a lawyer ‘s fees will be about $1,200.
If you’re not a first-time buyer, you’re also responsible for the property transfer tax of 1 per cent on the first $200,000 and 2 per cent on the balance. There’s an exemption for first-time buyers paying $475,000 or under.
Buying expenses can also include a site survey, optional title insurance and strata move-in/move-out fees.
And don’t forget about moving expenses . You’ll have to pay a moving company, or truck rental and fuel costs, plus moving insurance. Then there’s the pizza and beer for your volunteer helpers.
You finally have a place to call your own. Now, you have to protect it and your valuables. Home owner’s insurance is important because it covers you for unforeseen incidents, such as fire, burglary, a flood, or sewer or water damage. If you’re in a strata, you’ll still need insurance to cover the contents of your home.
Basic coverage might not be enough. If your home has some knob-and-tube wiring, for instance, you’ll pay more. Or you may want to take out riders on your expensive artwork or home office. Earthquake or other special coverage will also cost extra. If you will be renting out part of your home, make sure your insurance company knows, otherwise your insurance could be void if something happens. Again, an independent insurance broker will help you find the best-priced insurance to cover your needs.
You’ll have to pay property taxes on your new home. You’ll get an assessment of your property’s value at the beginning of each year, and your municipality will calculate your property taxes based on that assessment. There’s relief in sight, however. If your Vancouver-area home is assessed at under $1,295,000, you’re eligible for a BC Home Owner Grant .
Often, a more affordable home comes at the price of a commute by cardefinitely something to add to the monthly budget. The BCAA Driving Costs Calculator is a big help here.
If you’ve been renting, it’s possible that many of your utility fees were included in your monthly rent. Once you own, there are heating, electricity, cable, Internet, home telephone, garbage, sewer and other local municipal fees to consider. You may even need to buy an annual parking pass to park on your street.
In addition, when buying a townhome or condominium, you’ll have monthly strata fees . These often include some utilities, but their main purpose is to pay for the upkeep of common property. And that’s where soon-to-be buyers might also end up with major replacement or repair costsbeyond the monthly strata fees. This is where some digging is required before you buy.
“I tell my clients to take the time to read through the strata minutes for the last two years,” says Gordon Bennett. “I know you could fall asleep reading them, but if you don’t and later find out the roof needs repairing, you could be in for a nasty financial surprise.”
Things do break down, so you need to have a bit of a financial cushion in case the washer decides to quit or your hot water tank bursts. If you live in a strata, your monthly maintenance fees will cover the upkeep of common property, but you’ll still be responsible for everything inside your walls.
And finally, unless you’re downsizing you may need extra furnishings or a lawn mower… things you didn’t need in your former home. If you’re feeling the pinch from all those other expenses, wait to buy these, or start off with second-hand or borrowed items until you can save up for what you want.
Or, if you’re a first timer, maybe the tax rebate you get from the first-time home buyers’ tax credit will cover some of it!
Don’t let all these hidden costs turn you off buying a home. If you practise due diligence, like Kimberly Macdonald, and take the time necessary to find out about all of the potential costs, you can be financially prepared. Then you’ll be able to kick back and enjoy your new home that much more.
ClosingCosts.ca has a handy calculator for home buying costs.
© 2016 Real Estate Weekly