Many bright-eyed and bushy-tailed first-time homebuyers are so focused on saving a down payment, that they forget the myriad of other costs that come with buying a home.
Unexpected costs at closing time—which can total in the thousands of dollars—are a good way to get your homeownership journey off on the wrong foot.
Here are some examples below. Some of these costs are notorious for catching new homebuyers by surprise.
Closing Costs to Plan For
- Appraisal fee – This doesn’t apply if you’re putting down less than 20% (i.e., getting a high-ratio, default-insured mortgage). For first-time buyers who put down 20% or more, it’s a cost that must be factored in. Appraisals run anywhere from $200 to $500+. In some cases, your lender or broker may rebate part or all of this fee. But make sure you’re not paying a materially higher rate for that rebate.
- Home inspection – While not mandatory, it’s worth the small price to have a professional inspect the property, especially if it’s not a condo. You have to be sure there are no faults that could jeopardize your home equity down the road. Inspections run from $300 to $500+.
- Legal fees – The signing of documents and disbursement of funds is typically performed by a lawyer or notary and generally runs between $1,200 and $1,700.
- Title Insurance –Lenders generally require title insurance before they’ll close your mortgage. It protects the lender (and you if you get a homeowner policy too) from losses related to title fraud, survey or zoning issues and other challenges to the ownership of your home. The cost varies depending on the size of the mortgage, but can easily run from $300 to $700 or more (sometimes much more if your mortgage is registered over $750,000).
- Mortgage default insurance – This applies to those putting less than 20% down on their purchase. The insurance amount ranges from 0.60% to 4.50% of the purchase price depending on down payment size. It’s typically rolled into the mortgage amount and becomes part of the homeowner’s monthly mortgage payments.
- Default insurance sales tax – For those in Manitoba, Ontario, Quebec and Saskatchewan, buyers must pay provincial tax on the insurance amount out of pocket. The tax rates range from 6% to 9.975% and must be paid in full at the time of closing.
- Mortgage broker’s fee – For a regular mortgage, mortgage brokers are paid by the mortgage lender. In some cases (as with non-prime financing), the homebuyers themselves must pay the fees. Broker fees in those cases can range from 1% to 3%+ of the purchase price.
- Land Transfer Tax – Often the largest closing cost of all, this is a tax levied across the country, save for a handful of provinces (e.g., Alberta and Saskatchewan). The rate varies by jurisdiction, but in most cases it is tiered. In Manitoba, for example, you would pay no tax on the first $30,000 of home value, 0.5% on the next $30,000, 1.0% on the next $60,000, and so on. Because of the burden this tax has on many homebuyers (it can run into the thousands of dollars), municipalities often offer rebates for first-time buyers and (occasionally) lower-income individuals.
Adding it All Up
You’re going to want to ensure there’s leftover money in your bank account to cover these costs. Financial institutions recommend setting aside at least 1.5% of the purchase price for closing fees. But that can often leave you shy.
On a $400,000 home, 1.5% covers just $6,000. In places like Toronto, land transfer tax alone can ding you $8,950 if you don’t qualify for rebates.
New Home Start-up Costs
But wait, there’s more.
Once you close on the purchase, the costs are just beginning. Maintaining a house isn’t cheap. It’s even more challenging when you’re cash-poor after pouring all of your money into the down payment. That’s not to mention the high upfront costs of setting up and furnishing your home.
- Moving costs – Most people budget for moving, but not enough. Whether you’re hiring a professional team or enlisting the help of friends with the allure of beer and pizza, always plan to be over budget in this area.
- Utilities – One of the first orders of business is to get your internet and hydro accounts set up, and potentially a landline if you’re part of the dying breed that still uses one. Such setup fees can set you back a few hundred bucks.
- Repairs or renovations – Once they’re moved in, homebuyers love to improve a home to “make it theirs.” While essential repairs should be dealt with right away, give yourself some time to get settled before dwelling on what walls, fixtures, pipes and flooring to rip out. It’s all too easy to overspend on upgrades and suffer renovation remorse.
- Furniture and appliances – If you’ve made the move from a one-bedroom apartment to a two- or three-bedroom home, you’re going to have a lot more space to fill. If you want those new appliances and fancy furnishings right off the bat, you need either cash or credit. If the latter, be warned that credit card bills add up incredibly fast. Home expenditures are one of the biggest reasons people get in debt and stay in debt.
- Decorations and window coverings – Here’s one that’s perpetually overlooked or downplayed. Blinds and drapes are surprisingly expensive, especially if you’re covering a whole house full of windows.
- Misc. – Depending on your home, location and lifestyle, there’s a laundry list of items you could pay for. We’re talking snow removal (equipment or service), gardening and landscaping (lawnmower, weed whacker, power drill, etc.), and a variety of other small appliances (air conditioning, space heater, vacuum, power washers, etc.)
Most new homebuyers would agree that it’s better to budget more than necessary than being caught off guard. The last thing you want is to be taking out cash advances on your credit card at 20% interest for expenses you didn’t anticipate.
While it’s never advised to rack up credit card debt, many new homeowners find themselves relying heavily on them following their home purchase. That’s especially true for appliance and home improvement store cards.
That’s the kind of financial self-destruction you just don’t need. The stress when bills come in is never worth it.
Fortunately, it can all be avoided with careful, honest and disciplined budgeting. And if we sound like your grandmother admonishing you, remember, she was a smart lady!