For many people, owning their own home is one of their major life goals. It comes with a sense of security and permanence that many desire. But before you jump into homeownership, it’s important to consider all the costs.
The difference between renting and owning is more than a simple comparison of rent versus mortgage repayments. Buying a house comes with lots of obvious expenses and some that you might not have thought of.
Let’s take a closer look at buying a house in Canada and all the costs you need to consider.
Calculate the Down Payment
The down payment is the amount of cash you can invest in your home upfront. The lender deducts this from the total purchase price of the home. You then repay the balance through your mortgage.
For homes purchased for less than $500,000, the minimum down payment is 5% of the purchase price. For homes $500,000-999,999 it’s 5% on the first $500,000 and 10% of the price over $500,000.
For properties over $1,000,000, you need a down payment of at least 20% of the purchase price. When considering financing a home, it’s good to make as large a down payment as you can afford.
Other Down Payment Considerations
It’s good to remember that these are minimum down payments. The mortgage company takes on more risk when the down payment is lower. This might mean higher interest rates.
Other factors affecting down payments include your employment status. If you are self-employed, you may need to put down a larger down payment.
If your down payment is less than 20% of the purchase price, you will also have to take out mortgage loan insurance. Quebec, Ontario, and Saskatchewan will be an additional provincial sales tax on this premium.
Support and Incentives
Various savings plans exist that allow you to save money tax-free that you can use towards the purchase price of a house. There is also a First-Time Home Buyer Incentive from the Canadian government.
This can contribute 5% or 10% towards the down payment. You will need to repay the incentive after 25 years or when you sell the house, whichever comes sooner.
The Home Buyers’ Amount is another tax credit you may be eligible for when buying your first home. This can result in a tax credit of up to $750.
Can You Afford the Mortgage Repayments?
Renting can be frustrating. It can feel like you’re paying off someone else’s mortgage, and they’re reaping the benefits. It’s important, though, that you’re confident that you can afford the monthly repayments before you commit.
There are two affordability criteria that you need to meet to qualify for a mortgage:
- Monthly housing costs (e.g., mortgage repayment) should be no more than 32% of monthly pre-tax income.
- Monthly total debt load (mortgage, car loan, credit cards, other debt) should be no more than 40% of monthly pre-tax income.
The purpose of these two criteria is to ensure that you do not take on more debt than you can reasonably afford. It’s a protection from financial headaches down the line.
If you don’t currently meet these criteria, there are steps that you can take. Get financial advice on how to reduce your monthly outgoings.
Look to pay off existing debts or save for a larger down payment. You can also take real estate advice on more affordable areas.
Costs Before Buying a House
Currently, the housing market in Canada is on fire. Demand for properties is very high, and many find it challenging to get onto the housing ladder.
However, many people are still able to find a home that they would like to buy. For your own protection and that of the mortgage company, there are a few costs to bear in mind.
Home Appraisal/Survey Fees
Mortgage lenders charge this fee for appraising your house. They do this to calculate the house’s value and whether they are happy to lend you the amount you have requested.
This fee varies but typically costs up to $500.
All homes, especially older ones, will give you some surprises along the way. You can keep these to a minimum by investing in a home inspection before you buy. This is not mandatory but is a sage thing to do.
In a home inspection, an expert home inspector will walk through the property. They will look at the condition of everything from the electrical and plumbing systems to the structure and insulation.
It’s best practice to make your offer subject to a successful home inspection. This will cost between $300 – $500 and, in some cases, more.
Costs on Closing Day
The seller has accepted your offer, your mortgage has been finalized, and your home inspection completed. Now you’re ready to arrange your closing and move-in date. Here are some of the fees that you will need to pay at that time.
An attorney or notary will help to draft all the documentation needed for a smooth home purchase. They will look out for your legal interests and perform necessary checks on your behalf.
These fees will usually be paid in full when the sale goes through. Depending on the lawyer you use, these fees can range from hundreds to thousands of dollars. Some lawyers may offer a fixed-price package for the transaction.
Your lawyer will pay government registration fees as they file documents on your behalf. Expect this to run to a few hundred dollars in additional costs.
Homes in Canada must have home insurance to qualify for a mortgage. This covers the structure and the contents of the home against theft, loss, and damage.
This can be made as a monthly payment or an upfront annual payment to the insurer. It will be your responsibility to make sure that this is in place from day one.
Land Registration Fees
When you buy a property, you need to register the title under your name. This process comes with a tax attached by various names, such as land transfer tax and property transfer tax.
The fee is calculated as a percentage of the purchase price of the house. This varies depending on home value and the province. Online calculators can help you to work out exactly how much you will pay.
In some provinces, such as Ontario, first-time buyers may be eligible for a land transfer tax rebate.
GST/HST is a form of sales tax paid on new builds or homes that have been heavily renovated. This can be a high additional cost to take into consideration.
For example, a $300,000 property bought in British Columbia would be liable for $36,000 in sales tax. This comprises both federal and provincial sales tax.
Occasionally, some housebuilders may include this in the sales cost. Be sure to check first to avoid a nasty surprise on closing.
Other Fees on Closing
Your mortgage lender may ask you to purchase Title Insurance. If there is ever a dispute in the future regarding your ownership of the property, this insurance will cover your legal fees. It usually costs a few hundred dollars for this insurance.
If you purchase a condo or condo apartment, you will need an Estoppel Certificate. This outlines all the fees associated with owning the condo. It also outlines the services that you will receive in return.
You can expect to pay around $100 for this certificate.
Moving into a condo comes with its own set of monthly or annual expenses. These fees are mandatory and may cover a portion of your utilities. In the main, they are used for ongoing maintenance and the cost of caring for communal areas.
It’s important to get a full breakdown of these fees before considering making an offer on a condo.
Last but sadly not least are moving costs.
The average cost of a move depends on the size of your home and how much stuff you have. Moving house is a great opportunity to declutter. This will also mean you spend less on moving costs.
If you’re making a long-distance move across the country, naturally, costs will be higher. You can keep costs as low as possible by doing as much work as you can yourself.
Other Insurances to Consider
It’s natural to wonder how you would cover your expenses if you become ill or even if you passed away.
Many homeowners take out life insurance policies to cover this eventuality. It may be wise to take out the coverage that would pay off the balance of your mortgage in the event of your death.
Critical illness and disability insurance can help you meet your mortgage repayments if you cannot work due to injury or illness. These are all optional insurances that you should consider when becoming a homeowner.
Count the Cost Before Buying a House
Buying a house can be a wonderful adventure – a major milestone in life. But before you consider taking the plunge, make sure that you can afford it. The dream can quickly sour if you don’t take all the costs into account.
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Contact us today to discuss our products and how they can help you.