What are Closing Costs?
March 3, 2016 | Posted by: Laurie Anne Faulkner
What Are Closing Costs?
When buying a home, especially upon purchasing your first home you will need to budget for extra expenses that will occur aside from your down payment. Some of the expenses related to buying a home are one-time costs that are paid up-front, while others are continuing costs paid after and through-out the ownership of your new home.
Here is an explanation of the Up-Front Costs you can expect to incur once you have found the perfect home and will need to budget for:
Your largest cost at the beginning is your downpayment. Lenders require at least 5% of the purchase price for a down payment. Anything less that 20% for a down payment and the mortgage will be considered a high-ratio mortgage and will be subject to CMHC Insurnace Fees. Any down payment of 20% or more of the purchase price is usually considered conventional mortgage and no additional financing fees will apply.
This is part of your down payment and must be paid out into trust with your Realtor or lawyer when you make an Offer to Purchase. Deposits are usually around 5% but can be as high as 10% or more of the purchase price depending on the area and property. Sellers may request that the deposit be increased once all conditions to purchase have been satisfied and the property is unconditional.
Your mortgage lender may require the property be appraised at your expense. An appraisal is an estimate of the value of the home and even part of the approval process needed to obtain financing – the property as well as the borrower must qualify under the lenders criteria. If the mortgage on the property is to be high ratio, the property may qualify for an “APV” ( automatic property valuation) appraisal through CMHC – this will cost you $150.00. If not, then an appraisal must be ordered. The cost is usually between $300 and $350 and must be paid when you contract for those services. An appraisal can take up to a week to complete.
HOME INSPECTION FEE
A satisfactory home inspection is often an important condition of the Offer to Purchase. A home inspection is a report on the condition of the home and generally ranges around $400 to $500, depending on the complexities of the inspection. Larger or older homes may cost more, especially if there is any suspicion of latent defects. This is paid for at the time of service.
The mortgage lender may ask for an up-to-date survey or certificate of location of the home on the property. This is a legal written and/or mapped description of the location and dimensions of your land. The survey should also show the dimensions and placement on the lot of any structure, including additions such as pools, sheds and fences. This shows the lender that the home is not encroaching on another property) prior to finalizing the mortgage loan. If the seller does not have one or does not agree to get one, you will have to pay for it yourself and this can cost upwards of $400. If a survey is not available, the purchaser may have the option of purchasing Title Insurance in favor of the lender – this is usually less expensive than a new survey.
Some local utility companies (hydro, gas, oil) charge a fee on closing to connect new buyers up to their service. More common, however, is an extra charge on the first billing.
INTEREST ADJUSTMENT (IA)
If you arrange to make your mortgage payments monthly on the first day of the month, and your transaction closes after the first day of the month, your lender will charge you interest on closing to the next interest date, called the Interest Adjustment Date (IAD), when your payment cycle will commence. This can be a sizeable amount, but it is the correct interest you should pay. For example, close on June 15th, pay 15 days interest on closing and start payments on August 1st.
Title insurance covers loss caused by defects of title to the property and may be recommended by your lawyer in lew of a survey- The cost depends on the property and can range from $200 upwards. This title insurance will be in favor of the lender and paid for by the purchaser in case of any title defects. Purchaser title insurance is also available, but is a different product than what the lender will request.
PROPERTY TRANSFER TAX
You pay Property Transfer Tax when you purchase or acquire an interest in a property. The tax must be paid when you register changes to a certificate of title with the Land Title Office. For example, a change may include adding or deleting a name from the title.
You have to pay this provincial tax upon closing. The cost is a percentage of the property’s purchase price and varies by province. The amount of tax due depends on the fair market value of the property that is transferred.
In British Columbia, the tax is calculated as follows:
If the fair market value is $200,000 or less, the tax is 1% of the fair market value.
If the fair market value is greater than $200,000, the tax is 1% of the fair market value up to $200,000, plus 2% on the portion of the fair market value that is greater than $200,000. and up to $2,000,000.00 and 3% of the balance over $2,000,000.00
If you are a First Time Home Buyer and the purchase price is $475,000 or less you may qualify for the First Time Home Buyer Property Transfer Tax Exemption.
NOTE: Property Transfer Tax is different from municiple property tax ( see below). You pay property tax on an annual basis for services you receive from your local government, even if no money changes hands.
PRE-PAID PROPERTY TAXES
In British Columbia, property taxes are due on July 2 of each calendar year for the entire year (Jan to Dec, but due on July 2nd). Depending on the date you take possession of your new home you may have to reimburse the seller for any property taxes he may have already paid as of July 2nd. This amount will be pro-rated to the date of possession. If the closing date is before July2nd and the seller has not paid the taxes, he will need to reimburse you for the pro-rated portion of the taxes he owes. The lawyer will adjust for this at closing and reimburse either party accordingly. If your new home is to be owner occupied, you may qualify for the annualHome Owners Grant (HOG).
The mortgage lender requires this because the home is security for the mortgage. This insurance covers the cost of replacing the structure of your home and its contents. Property insurance must be in place on closing day. The cost will vary depending on the purchase price, proximity to fire hydrants and fire stations and type of dwelling. This can average from $1500 per year upwards for a single family home. Strat Title units carry insurance for the whole building and this is included in your strata fees. Contents insurance will be a separate item and is not required by the lender.
LEGAL FEES AND DISBURSEMENTS
For his Fee your lawyer will review the title, insurance, or other evidence of title to make sure that title to the property is clear and can be transferred. He will confirm that there are no covenants, easements, liens, etc. registered against the house that will adversely affect your enjoyment of the home and he will prepare and register all the legal documents and ensure funds and title are exchanged properly - disbursements are any costs incurred by the lawyer such as land titles costs to check on the legal status of the purchased property,faxing, copying etc… these fees must be paid upon closing and will range from $800 to $1200 on average (plus GST).
In any real estate transaction, the lawyer is responsible for the following:
- Assist with and review the Contract of Purchase and Sale
- Preparation and review of mortgage documents
- Ensure all closing documents have been completed properly, including the title search and title insurance
- Explain all closing documents, obtain signatures, and record all documents with the appropriate local governments
- Collect the transaction fees and disburse funds to the appropriate parties
- Prepare and present a final Statement of Adjustments
WATER QUALITY TEST
If the property has a well, you will want to have the quality of the water tested to ensure that the water supply is adequate and the water is potable. Price will vary depending on location. This should also be a condition on your Offer to Purchase.
MORTGAGE LOAN INSURANCE PREMIUM
If yours is a high ratio mortgage (less than 20% down payment), you will need mortgage loan insurance to secure a mortgage. Mortgage loan insurance helps protects lenders against mortgage default, and enables consumers to purchase homes with a smaller down-payment — with interest rates comparable to those with a 20% down payment. Without this insurance, the risk to the lender would be too great and purchasers would need to come up with substantially more cash for a down payment.
The amount of the premium varies and can range between 0.65% and 3.65% depending upon how much of the purchase price/home value is financed with a mortgage loan.
Your lender will add the mortgage insurance premium to your mortgage or you can pay it in full upon closing.
NOTE: Mortgage loan insurance is not to be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will be paid out so as not to be a burden on those left behind.
MORTGAGE LIFE INSURANCE
Mortgage Life Insurance is a form of insurance specifically designed to protect a repayment mortgage. If the policyholder were to die while the mortgage life insurance was in force, the policy would pay out a capital sum that will be just sufficient to repay the outstanding mortgage.
Mortgage life insurance is supposed to protect the borrower’s ability to repay the mortgage for the lifetime of the mortgage. This is in contrast toMortgage Loan Insurance, which is meant to protect the lender against the risk of default on the part of the borrower.
Mortgage life insurance is not a legal requirement when purchasing a home with a mortgage. It is optional and up to the individual purchaser to decide if they would like to purchase mortgage insurance or not. There are many different types of mortgage/life insurnace and each purchaser has individual reasons to purchase insurance or not – married/single/children etc…
This may including van rental and boxes
SERVICE HOOK-UP FEES
Charged for utilities. You may be required to pay a deposit for utilities such as telephone and heating services.
You may have to pay 7% GST sales tax in British Columbia on a New Home or Substantially Renovated Home
If you purchase a new or substantially renovated home, GST may be applicable.
You may be eligible to claim the GST new housing rebate if you:
■ purchased a new or substantially renovated house (building and land) from a builder;
■ purchased a new or substantially renovated mobile or floating home from a builder (this includes the manufacturer or vendor);
■ purchased a share of the capital stock of a co-operative housing corporation (co-op); or
■ purchased a new or substantially renovated house from a builder where you leased the land from that builder under the same agreement to buy the house and the lease is for 20 years or more or gives you the option to buy the land.
The following link will help you determine if you are eligible to claim a GST/HST new housing rebate and complete the necessary forms.
NOTE: your lawyer and accountant will be able to help you determine if and how much HST is applicable.
COSTS AFTER POSSESSION
Additionally, once you have purchased your home, you will incur regular expenses on a monthly, quarterly or yearly basis.
Some of these costs include:
• Mortgage Payment
• Water and/or Sewer Payments
• Hydro Electricity and Gas Services
• Cable and Telephone Services
• Property Taxes
• Strata or Condo Fees
• Repair/Maintenance Expenses
• Homeowner’s Insurance
• Repairs, upgrades, renovations.
Please call me and I can give you a estimate of what your actual closing costs will be - Laurie Anne at 250-588-2288