Buying a home
What it will cost and how to prepare for it
By Wayne Karl
So, you’ve saved over the years for a down payment on your home, and you’re eager to take the plunge. This is a critical first step, but it’s also important to exercise caution and survey all the costs involved. This is, after all, quite likely the most important financial decision you will ever make, so do it carefully.
A good way to start is to pay a visit to your financial planner, your banker or a mortgage broker, just to get a good idea of your full financial landscape – everything from an assessment of your assets and liabilities, to your savings, credit rating and everything in between. This will give you a good idea of your net worth and just how much home you can afford. This is also where, if you haven’t already, you will soon learn the importance of your credit rating, also known as your credit report. This is a detailed collection of your entire borrowing and repayment history, used by lending institutions to assess your credit-worthiness. Like it or not, many places consider your credit rating a good indicator of your character. The report contains details on any previous loans, payment history, where you’ve lived and worked, whether you have been sued and if you have declared bankruptcy in the last seven years.
You have a legal right to access this information – not just to see where you stand, but also to correct any errors. And errors do occur, but many people discover them when it’s too late – such as when they go to buy a home. How much can you afford? Once you get a clear understanding of your financial situation,you can figure out what you can afford in monthly housing payments.
Generally speaking, lenders follow two affordability rules to determine how much you can pay:
The first is that your monthly housing costs shouldn’t exceed 32 per cent of your gross household monthly income – your Gross Debt Service ratio. These costs include monthly mortgage principal and interest, taxes and heating expenses. If you’re buying a condo, half of the monthly condominium fees are factored into the equation.
The second affordability rule is that your entire monthly debt load – including housing costs, car loans and credit card payments – shouldn’t exceed 40 per cent of your gross monthly income. Lenders total these debts to determine the representative percentage of your gross household monthly income, which is known as Total Debt Service ratio. Another cost you may hear about during your home search is the harmonized sales tax, a levy that in Ontario combines the eight-per-cent PST and five-per-cent GST, and in BC the five-per-cent GST and seven-per-cent PST, as of July 1, 2010. How the HST will impact your home purchase depends on whether you buy new or used property. Estimates are that it will add about $2,000 to the cost of buying a resale home, since the tax will be applied on items such as real estate agent commissions, lawyer’s fees, home inspections and appraisals.
For new homes priced under $400,000, buyers can get a 75-per-cent tax rebate which, combined with input tax credits, means you will pay no more tax than under the previous structure. For new homes priced at more than $400,000, HST will be charged only on the amount above that threshold.
If you’re buying a new home, experts stress that as a general rule, you should still check with your builder to see exactly how it is handling the HST. Buyers of resale homes and who purchase before July 1 will likely avoid paying the extra tax on the services to close your deal.
Sources also stress that buyers of new homes should have their lawyer review the fine print of any purchase agreement before they sign, to know exactly how the builder is handling the HST. Some builders may embed the HST in the purchase price, as they have with the GST.
How much will it really cost?
Other up-front costs to consider when buying a home
Mortgage loan insurance premiums Where the down payment is less than 20 per cent of the total price, will likely require insurance. You may be asked to pay the premium in full upon closing, or have it added to the mortgage.
Appraisal fee Your lender may require that the property be appraised, at your expense, to determine its value. This fee is usually between $250 and $350.
Deposit This is part of your down payment and must be paid in order to make an Offer to Purchase. The cost varies depending on the area, but it may be up to five per cent of the purchase price.
Down payment With mortgage loan insurance, you can own your home with a minimum down payment of five per cent.
Home inspection fee Costing about $500, a home inspection examines the condition and operating systems of the home. It is critical before you buy a property, and it is recommended that you make this a condition of your Offer to Purchase.
Land Registration Fees You may have to pay this provincial or municipal charge upon closing. The cost is a percentage of the property’s purchase price and varies between areas. If you buy in Toronto, you will also have to pay a Municipal Land Transfer Tax, on top of the provincial Land Transfer Tax.
Property insurance The mortgage lender requires this because the home is security for the mortgage. This insurance covers the cost of replacing your home and its contents and it must be in place on closing day.
Survey/certificate of location The mortgage lender may ask for an up-to-date survey or certificate of location before finalizing the loan. The typical cost is $1,000 to $2,000.
Legal fees and disbursements These must be paid upon closing and cost a minimum of $500 (plus GST/HST). Your lawyer will also bill you direct costs to check on the legal status of your property.
Title insurance Your lender or lawyer/notary may suggest title insurance to cover loss caused by defects of title to the property.
Wayne Karl is an award-winning writer and editor with expertise in real estate and business. E-mail Wayne at firstname.lastname@example.org