The real cost of buying a house
So, you decided it’s time to enter the real estate market. You’ve scoured the web, made some pro/con lists, and found your ideal neighbourhood - maybe even your dream home. What’s next? Preparation, prioritization, and planning. (Maybe planning is the same as preparation, but we like alliteration, ok?)
The number one cost most of us think of when it comes to home ownership is the down payment, which could be 5-20% of your purchase price. There’s no doubt this is an important cost to take into account, but there is more to plan for when you’re embarking upon the exciting journey to become a homeowner. A little planning can go a long way to prevent relying too heavily on high interest credit later on, so let’s take a look at the usual suspects.
Pump the brakes – Many first time homebuyers make the mistake of buying a new car immediately prior to buying a home, but that may not be the ideal timing for such a purchase. First, getting a car loan can affect your credit score, which is incredibly important when you’re trying to get approved for a mortgage. Second, you’ll have to consider the impact of this brand new monthly payment on your overall ability to make your mortgage payments. And don’t forget to factor in all the additional costs that come with a car. If you truly need to own a car, no judgement here, just give some thought to the timing and prioritize.
Mortgage default insurance - When you’re saving your down payment, it’s a good idea to take into account your overall budget, which will be a deciding factor if you end up with an insured or uninsured mortgage. If your down payment is less than 20% of the purchase price of your home, you will have to pay mortgage default insurance (not to be confused with home insurance) through the Canada Mortgage and Housing Corporation (CMHC). Your premium can be calculated here, and the amount will be rolled into the overall amount you are borrowing.
Home inspection - Before signing on the dotted line, you’ll need to have a valid home inspection. At times, the seller will advise you they have already had one done, however, it is prudent to get one regardless, and avoid any unwanted surprises. A home inspector will look for things that aren’t always readily visible during a walkthrough, like the foundation and structural integrity, plumbing, electrical, and ventilation. A home inspection will cost between $300 - $500, which may be worth the cost for that peace of mind. You can find a home inspector through the Canadian Association of Home and Property Inspectors or ask for recommendations from friends or family who have recently purchased a home.
Lawyer’s Fees - If the team assisting you with your home purchase were the Avengers, your real estate lawyer would be Iron Man. There are so many moving parts in the home buying process your lawyer will be responsible for. From reviewing your Agreement of Purchase and Sale and securing title insurance, to registering the property in your name and handing over the keys on closing day, the role of a real estate lawyer is not to be understated. Expect to shell out $1,500 to $2,000 for lawyer’s fees.
Land transfer tax – Land Transfer Tax, or LTT, is one of the most overlooked closing costs. All provinces charge LTT, with the exception of Alberta and Saskatchewan, who charge a land title transfer fee, and a registration fee, respectively. The amount of your LTT is calculated depending on the purchase price of your property, and the province you live in. Check out a Land Transfer Tax calculator to get an estimate of how much you should expect to pay.
Interest adjustment – Another under the radar cost! In most cases, the closing date (the day the funds for your mortgage are advanced) is not necessarily the date your first mortgage payment comes out, resulting in a period of interest accrual before you start making payments. This amount is what is referred to as the Interest Adjustment. The interest adjustment is typically not an astronomical amount, but it is still important to plan for it. You can pay it in a variety of ways, from paying your lender directly, deducting it from the loan amount, or even rolling it into your first mortgage payment.
Furniture and paint - Furnishing and decorating your new place is exciting, but do you really need that chaise lounge in the bedroom? While we’re not suggesting sitting on the floor for the first few months, consider making a list of everything you want to make your house feel like home, and prioritize. Start with the basics and reassess after a few months. The same applies for painting your new pad. You might not be a fan of the eggplant the previous owner chose for the guest bath, but you do get to decide if it is a “right now” expense, or if it’s something future you gets to paint over.
Appliances – Most homes come equipped with major appliances like the fridge, stove, washer and dryer, but after you start getting used to your new place, perhaps you notice your new fridge just isn’t big enough for your growing family, or you have your eye on an energy efficient dryer. It may be tempting to run towards the siren call of that big box appliance store offering a terrific financing deal on your shiny new stainless steel appliance, but there are a few factors to think about here. First, applying for financing from a store often consists of them doing what’s referred to as a “hard” credit check in order to qualify, which can affect your overall credit score by a few points. Second, read the fine print. 0% financing sounds great, but it’s only 0% for a fixed amount of time. Meaning if you don’t pay the loan within the agreed upon period, you might be looking at a hefty charge with interest rates in the double digits.
Windows – New windows is a cost of purchasing a home that often goes overlooked. (See what we did there?) Trying to come up with $3-5K when you need new windows before winter may force you into high interest debt on a line of credit, while if you have money put away for home improvements you’re prepared when these things happen.
Renovations – Not everyone purchases a move-in ready home. Perhaps you saw a place with great bones in an ideal location and are excited to flex your HGTV muscles to update it. You have a couple of options here. The CMHC offers financing options for new builds, or existing homes that require some improvements. With the CMHC Improvement mortgage, you can conveniently roll some of the costs of home improvements right into your mortgage amount. Talk to your mortgage broker to learn more. Your second option here is to save up and renovate gradually. This requires a lot of discipline and patience. Are you ready to live in a work in progress for months, maybe more, while you work towards developing your dream home? The choice is yours.
The bottom line? Some of these costs are unavoidable, however, some you can save for and do gradually. Can you deal with your aunt’s second hand sofa for a few months until you’re able to save up for one that matches your new décor? Consider a slipcover and save those pennies! We’re willing to bet that’s what auntie would tell you to do.
