Find Out The Hidden Costs Of Buying A Home In Canada

Buying a home is more than just making the downpayment and starting the monthly mortgage payments. There are other hidden costs involved, and more often than not, first-time homebuyers are usually not aware of them.

These costs include closing costs, one-time costs and ongoing costs.

Buyers can expect to spend anywhere from 1% to 5% of the total purchase price on such costs, depending on the type of house and other factors.

You can consult a real estate professional to know what to expect, but in the meantime, to help you budget, we have compiled a list of expected costs for you.

Closing Costs

Appraisal Fees

Your lender may require an appraisal before signing off on your mortgage. An appraisal helps determine the value of the house and in turn, prevents you from borrowing more than is necessary.

Appraisals usually cost anywhere from $300 to $500. Some lenders waive this fee or include it as part of your mortgage.

Property Survey

Some lenders require a property survey to determine the measurements of the plot and identify all the structures situated on the property. The survey also helps determine if there are any encroachments on the land and whether the property is sufficient to cover the collateral of the mortgage loan.

An alternative to a property survey is title insurance. However, note that title insurance only covers the lender. So if you happen to forgo a survey and later find out the backyard in your property is indeed not yours, the title insurance will only compensate your lender.

A property survey is more expensive than title insurance. Costs range from $1500 to $2500.

Title Insurance

Title insurance is increasingly becoming popular in Canada as many buyers consider it a cheaper alternative to a property survey. Title insurance protects you and the lender from zoning issues, encroachments, property defects, title fraud, violation of municipal by-laws etc.

The average cost of title insurance is around $275. The cost varies from province to province.

This is a one-time cost. To pay for title insurance, you have to tell your lawyer to order it as part of buying the property.

Land Transfer Tax/Title Transfer

A land transfer tax is required when buying a home. The tax is usually paid to the province during the closing stage. Some municipalities like Toronto also charge a land transfer tax, so buyers pay the provincial and municipal land transfer tax.

The tax is usually calculated using a multi-tiered system so the total amount is based on the purchase price of the house.

House buyers in Alberta, Nunavut, Saskatchewan, and Yukon are exempt from paying land transfer taxes. In Alberta, home buyers are required to pay Land Transfer Registration Fees and Mortgage Registration Fees. These are less costly compared to the land transfer tax of other provinces.

Sales Tax

If you buy a new home or a substantially renovated home, you may be required to pay the goods and services tax (GST) or the harmonized sales tax (HST). In the case of a house previously owned by someone, a sales tax is not required.

Home Inspection

A home inspection is highly recommended if you’re buying a house. Hiring an inspector will help discover any underlying issues such as water damage, plumbing, electric wiring, infestations, and much more.

Any issues discovered during an inspection can be used as a bargaining chip during the negotiations. As a buyer, you can ask the seller to fix the discovered issues or reduce the purchase price to cover the cost of repairs.

In hot markets like Toronto and Ontario, many buyers are foregoing inspections for fear of missing out on a deal. This is not a good idea but if you want a house so bad, at least put in an offer contingent on getting a full house inspection done.

Inspections costs can range from $300 to $500, depending on the size of the home.

Legal Fees

When buying a house, hiring a real estate lawyer may come in handy. While optional, a lawyer can help with the complexities of the closing process including checking for HOA encumbrance on the property, any outstanding legal issues on the property, title insurance and transfer and a whole lot more.

Realtor Commissions

When buying a home in Canada, getting a realtor is optional but recommended as realtors work solely to serve your interest in real estate transactions.

Buyers don't pay their realtors as it is the responsibility of the listing brokerage. The realtors' pay is deducted from the proceeds of the sale, so it is the seller who pays both the listing agent and buyer's agent.

It can be argued that the buyer indirectly pays the realtor commissions as the seller may adjust the house price to cover the realtors' commissions.

The realtors' commissions range from 2 to 3 percent of the purchase price. So if both the buyer's agent and listing agent receive 2.5%, the total commission would be 5% of the purchase price.

One-Time Costs

Down Payment

A downpayment is required when buying a house if you’re planning to fund your purchase through a mortgage. In Canada, the down payment is calculated as follows:

If you have a poor credit score or unpredictable source of income such as self-employment, your lender may require a larger down payment.

In addition, if the down payment is less than 20% of the purchase price, you will have to get mortgage default insurance.

Utility Setup

After buying a house, it's time to set up your utilities such as electricity, gas, water, cable and internet. More often than not, your utility company will charge setup fees and may require a deposit before hooking up your house or transferring the utilities to your name.

Moving Costs

Moving to your new house will incur moving costs. This depends on the distance and amount of belongings you want to move. However, this cost can be reduced by hiring a moving truck and getting help from friends and families with packing and unpacking.

If you opt to hire a moving company, it’s going to cost more.

Ongoing Costs

Mortgage Default Insurance

If you make anything less than 20% of the purchase price as a down payment, your lender will require you to get mortgage default insurance. This protects your mortgage lender in case you default on your payments.

Once you default on the payments, the insurer will pay your lender and oversee the legal proceedings and recovery of the outstanding amount.

In some cases, if a real estate transaction is of high value, the lender may deem it too risky and require a borrower to get mortgage default insurance.

Mortgage Life Insurance

This is an optional cover that ensures your payments are made in case something happens to you, like death. The amount of coverage usually decreases to correspond with the decreasing outstanding balance of the mortgage loan.

Property Taxes

Property taxes in Canada are paid on a quarterly, semi-annually or annual basis. In Alberta, property taxes are billed annually.

They are calculated based on the value of the house. Property taxes paid to the municipality help in funding the management of schools, transport infrastructure, garbage collection, snow removal, fire stations, etc.

In some cases, if the seller of the house paid the property taxes past the closing date, you may have to reimburse the seller. Especially if the taxes are billed quarterly.

Also, before closing on a house make sure your lawyer or realtor checks if there are any outstanding property taxes on the house.

Mortgage Plus Interest

A mortgage is a loan given to you by your lender when buying a home. Since many cannot afford to fully pay for a house out of pocket, they choose to get a mortgage. When you make a downpayment, the total purchase price minus the down payment is your mortgage loan.

After closing on your house, you will have to start making the monthly mortgage interest payments. Note that your mortgage loan includes interest and your payment will go towards clearing the loan and the interest.

HOAs and Condo Fees

HOAs and Condo Fees are some of the fees not talked about enough. In addition, many Canadians are not aware of such fees.

Cases of buyers closing on homes only to realize later that their home is under an HOA are not unheard of. In such instances, by the time they realize there is an HOA, it's usually too late and the owners are forced to pay the HOA fees plus penalties, interest or legal fees.

HOA fees are charged by Homeowner Associations to fund the upkeep of community amenities such as pools, decorations, common areas, etc. while condo fees are charged by the condo board to fund the maintenance of condo amenities.

HOA fees are paid annually and range from $40 to $1000, depending on the number of amenities that have to be maintained. Condo fees are paid monthly.

Home Insurance

Your lender will most likely require you to get home insurance before approving you for a mortgage. Home insurance insures against damage to your home from fires, accidents, floods, etc.

The cost of the insurance will vary depending on the amount of coverage, location, home amenities, etc. It's a good idea to shop around for the best rates and coverage rather than settling on any coverage.

Conclusion

When budgeting for expenses that you may incur when buying a house, remember to shop around for the best rates. You’re bound to get an affordable rate for insurance, mortgage loans, inspection fees and legal fees if you look hard enough.