Imagine this: You’ve scrimped and saved for more than three years and now you finally have enough for a down payment on your first home. After a couple months of searching, you’ve found “the one” and decide to make an offer. Yes! It’s accepted – conditional upon a home inspection, of course. When the inspection report comes back clear and you decide to make an offer to purchase, you pull out all of your savings and use it as a down payment against the purchase price. After getting your mortgage in-place, you know your monthly mortgage payment will give you just enough breathing room to still enjoy life, and you could not be more excited to move in. Then, as soon as you agree on a closing day with the buyer, it hits you: closing costs.
Closing costs are a reality for all homeowners, whether you are buying, selling, or refinancing. If you’re a first-time homebuyer, however, seeing the total amount can come as a shock. According to a TD report, 60% of first-time buyers said they would have been more thorough when it came to budgeting the costs of buying and owning a home, and 6% admitted they didn’t budget for anything more than their down payment. In Canada, it’s a good idea to assume your closing costs will range from 1.5-4% of the purchase price of your new home. For example, if you bought a home for $300,000, your closing costs could be in the $4,500-$12,000 range. Are you wondering how closing costs could be so expensive? Let’s take a quick look.
If you’re buying a home, your costs start when you commission a home inspection. When you make an official offer to purchase, you have to include a deposit (which can be part or all of your down payment). Then, when closing day arrives, you’ll have to pay for the big-ticket items: land transfer tax, title insurance, PST on your mortgage default insurance (if you put down less than 20% and live in Manitoba, Ontario or Quebec) and finally, legal fees and disbursements. Land transfer tax is usually the biggest expense, unless you’re buying in Alberta or Saskatchewan where they instead charge a much smaller levy. If you’re buying a resale home, you may also have to pay the seller back for any prepaid property taxes or utilities. Or, if you’re buying a new home, you will have to pay HST on the purchase price as well as a warranty fee. The costs add up!
At RateHub.ca, our goal has always been to bring Canadians the best mortgage rates, so buyers can be empowered to make smart mortgage-related decisions. But, even more importantly, we try to give our users the most up-to-date information on all possible home buying situations. From offering basic information around mortgages, to helping you calculate what a refinance might look like, our education centre was developed with you in mind. And while we want you to have access to the best mortgage terms available today, we also want to make sure your home buying process is properly budgeted for, so you’re not thrown off by the final sticker price presented to you on closing day.
If we could offer one financial tip to readers, it would be this: know that you need to save for more than just a down payment. Before you even begin to start house-hunting, crunch some numbers and keep notes of what your closing costs could add up to. For example, if you are thinking of buying a home in the $300,000 range, calculate how much you want to put down (e.g. 10% = $30,000) and what your closing costs might be (e.g. 4% = $12,000) and save that amount ($42,000) before you make any offers. If you want to be safe, assume your closing costs will be at the maximum of the 1.5-4% range (so, 4% of the purchase price). That way, if your closing costs add up to less, you’ll have an extra cushion in your savings account, for any of the other monthly costs and maintenance fees that could come up during your first few years as a new homeowner.
Note: This post is a submission for the Blog for Financial Literacy campaign.