Mortgage vs. HELOC
When budgeting for a new home, so much of the focus is on the down payment and mortgage rate that it’s easy to forget about closing costs. But the last thing you want is to find your dream home, only to realize that you can’t afford it because of costs you didn’t budget for.
Lenders generally recommend that homebuyers budget for at least 1.5 percent of the purchase price for closing costs. This should be considered the minimum, however. A safer approach is to put aside four percent (e.g. $8,000 for a $200,000 property).
And it doesn’t end with closing costs. Once you have successfully purchased your home, you’ll face ongoing expenses unique to home ownership. Below you’ll find a good overview of both types of costs.
Down Payment – While this is not a closing cost, you’ll need to have at least five percent of the purchase price before you start home shopping. This is the minimum down payment required in Canada. If the property you’re purchasing is more than $1 million, a minimum down payment of 20 percent is required, assuming you want the best available rates.
PST on Mortgage Insurance – For down payments of less than 20 percent, home buyers are generally required to buy mortgage insurance (a.k.a., CMHC Insurance). In Ontario, Saskatchewan, Manitoba and Quebec you pay provincial tax on the mortgage insurance premium. This tax must be paid when you close your purchase.
Land Transfer Tax – This tax is levied on properties purchased in all provinces except Alberta and Saskatchewan. It’s generally a percentage of the property price, although exact methodology depends on where you live. Use our Land Transfer Tax Calculator to calculate this cost for homes in your area.
Legal Fees - A lawyer’s services are required to execute the mortgage documents and complete the mortgage transaction. Budget at least $900 to $1,400 for this.
Title Insurance – This insurance is required by most lenders before they’ll close your mortgage. It provides coverage for losses related to title fraud, survey or zoning issues, and challenges to the ownership of your home. Budget at least $300 for this, or more if it’s a large mortgage or secured line of credit on an expensive property.
Appraisal – If the mortgage is not default insured, most lenders will want an in-person valuation of the property to confirm its market value. Budget at least $300 for this as well, and more if the property is remote or the home is over $1 million.
Home Inspection - A home inspection assesses the condition of the property and identifies potential maintenance and structural issues. While it’s not mandatory, it is recommended prior to completing a purchase agreement. It can help avoid unexpected costs down the road related to things like faulty foundations, mould and structural issues. It’s generally recommended you budget $350 for this, though home inspection costs can vary.
Status Certificate – Also known as an estoppel certificate in some provinces or “Form B” (in B.C.), this document is required by lenders for condominium purchases. It is a legally binding document from the condominium corporation that outlines the building’s financial and legal health. It also contains the obligations and rights of the condo board and condo owner. The cost is around $100.
Property Taxes – Annual property taxes are calculated as a percentage of the current, estimated assessed value of your property. These taxes can be incorporated into your mortgage payments, or paid as a separate bill. They are paid monthly, quarterly, semi-annually or annually depending on your municipality and on whether the lender collects the taxes from you.
Home Insurance - Having adequate home insurance is a necessity for mortgage financing. It protects you against fire, floods and other hazards that could damage your property. Compare home insurance rates with us to find the best deal.
Condo Fees (if applicable) – Maintenance fees for condominiums depend on the size of your unit, building amenities, and the location. Fortunately, information on condo fees is publicly available before you begin the home buying process. Be sure to do your research before you buy.
Adding up the costs of home ownership can be daunting. It’s always better to be aware of potential costs and have the cash safely tucked away rather than get caught off guard and have to rely on high-interest credit to pay your bills.