So you get pre-approved for your first mortgage or your next mortgage, and found a home you love!! Exciting, right?!?! Yes, it is, but if you're a planner like me, you'll want to be totally aware of all the costs associated with buying your new property. There are many potential costs outside of your downpayment.
DO NOT rely on the broker's opinion of your maximum approval as your maximum approval may be MUCH MUCH higher than it should be if you desire doing anything other than working and paying bills in your immediate future. It pains me to know that so many brokers and Realtors fail to help their clients understand the cost implications of buying AND existing in their new home.
When I bought my last property, I wrote out my closing costs first, then worked towards reviewing and evaluating the ongoing new homeownership costs. After seeing the WHOLE picture, I could decide if I could do it. I used to tell customers, that it isn't worth sleeping on the floor and eating kraft dinner to push beyond your comfortable means and get inside that new-to-you-house.
You'll sleep much better, and eat much better, knowing you've moved forward with a fully informed decision.
I'll walk you through the process I went through below. Again, feel free to send questions anytime. I'm happy to help.
Above is an example of a 350,000 property. For this example, I've assumed a 10% deposit will be paid equalling $35,000. Since the deposit is less than 20% of the property purchase price of 350K, a CMHC premium will be payable. Essentially, the bank considers any mortgage with less than a 20% down payment to be high-ratio, and they require it to have a special insurance. This insurance premium is very expensive, and needs to be considered in your decision making, or at the very least, you need to be aware of this premium. You can calculate your own premium, using the CMHC Calculator. In our example, it equals, $9,765 or 3.10% of the price of the property less the downpayment. This can be blended into the mortgage, or paid in a lump sum. For our example, we'll assume it's included in the mortgage. So now, the principal balance owing on the mortgage is $324,765.
Next, the bank may require an appraisal of the property. The reason for this is that your first pre-approval, is a pre-approval of you. For our example, this means, if approved, the bank feels you can handle payments for the $324,765 mortgage, but what they now need to know, is whether or not the property you've made an offer on is actually worth THEIR $324,765. They're evaluating risk for themselves. They need to know if you default (can't pay), that they have a high chance of recouping the costs.
Pre-approvals really happen in two parts, the first is approving you as being good for the money, the second is approving the property for the money you've agreed to pay as part of your offer. The appraiser is brought in to offer the bank their researched opinion of value. Some lenders will cover this cost, or reimburse you, in other cases, it's a cost you need to pay. For our example, let's assume you're paying. So it's another $300 you need to have in cash.
Move-In / Move-Out Fees
If you're moving into a condo building, there is often a move-in / move-out fee. This fee is charged since there are elevator pads that need to be put up prior to your scheduled move. This fee also assumes minor wear and tear and often goes towards patching or painting walls. In our example, it's $250.
Property Taxes and Adjustments
Depending on where you live, property taxes are paid in full, and cover a calendar year. Where I live, property taxes are usually payable on July 2nd, and cover January 1 - December 31st. Assuming you move in anytime after July 2nd, this implies the Seller of the property has already paid for the entire year, and the lawyer/notary needs to take from you, to repay the seller. This will happen on the Statement of Adjustments (the legal verbiage for a sheet of paper depicting who-owes-who-what) at time of closing, but this one time fee (meaning the adjustment - not property taxes as they will be annual) should be considered.
Google the municipality of your new property. Try and find the prior years taxes for this property. If you can't find it, ask your Realtor. This isn't a perfect method but can give you a gauge of this fee. If you can even find the prior year's mill rate, and multiply it by the properties assessed value, you can get a sense of the annual taxes. You can usually take this annual amount and deduct some kind of homeowner grant. Use the net amount to make your calculation. If you're totally stuck, call the property tax department near your new home, and ask for an estimate.
Assuming your purchase completes on October 4th. You take the annual property taxes - for our example $2,300, divide this number by 365 days in the year. This equals $6.30 per day. Since there are 88 days between October 4th, and December 31st, you would owe the seller $6.30 X 88 = $554.40. Again, this will show up on the statement of adjustments at closing.
The reverse can also be true, where you move in BEFORE July 2nd, and the Seller will CREDIT you the amount you'll end up paying on July 2nd for the whole year.
A property inspection is recommended when purchasing any property. The reason for the inspection is straightforward - just a reminder to consider this cost. It can be approximately $500 plus taxes.
To find an inspector, ask your Realtor, or ask friends and family for recommendations.
You'll need a lawyer or notary to complete the sale of the property. If you don't have a lawyer/notary lined up. Ask your Realtor or your friends for a list of recommendations. Call the lawyer/notary now and ask them to give you an estimate of costs to finalize this transaction.
In our example, we'll assume $1,500. This includes fees, disbursements, and other random costs like "cost for lawyer to find out property taxes from municipality".
In the province of BC, a buyer of property is required to pay Property Transfer Tax. There are new rules surrounding property transfer tax. For example, buyers of new real estate, in some cases, are exempt from paying this tax, and first time home buyers can be exempt too.
In our example, we'll assume, this tax is payable at 1% on the 1st 200K, and 2% of the balance of the purchase price. This equals $5,000. This fee is not blended into your mortgage. This is an amount, in addition to your down payment, that is required on the closing or completion date.
FEDERAL TAXES and GST
In the province of BC, GST is applicable to new real estate and land. GST is currently payable at 5% of the purchase price. In some cases a GST rebate is available, lessening the total amount of GST paid. The rebate exists up to a purchase price of $450,000, with special conditions, of course. If you're purchasing a home that's previously been lived in (a re-sale), GST is likely not payable. If you are purchasing a new home, you can use the calculators provided by BC Real Estate Council. You can find the calculator HERE to determine cost.
The point of this exercise is to outline how many additional costs (beyond your down payment) are required when purchasing a home. In this example, another $8,300 would be required when meeting with the lawyer at time of closing. So roughly $43,000 when including the down payment.
Tomorrow, I'll work through homeownership costs. Like the purchasing decision, having knowledge of the on going costs associated with your new home can help you make a smart decision and enjoy more restful nights.