First-Time Canadian Homebuyer: a walkthrough, day 2

In the last article (How To Purchase A Home For The First Time In Canada), we walked through the first two steps of the home buying process, which …

In the last article (How To Purchase A Home For The First Time In Canada), we walked through the first two steps of the home buying process, which hopefully helped to digest some of the initial mental processing involved with ‘taking the plunge’ into home ownership. Today’s topics will cover more of the mapping process.

Step 3: How much does owning a home REALLY cost?

If only owning a home were as simple as making your monthly mortgage payments and keeping the lights on! There are many costs that you will find are embedded in the process of purchasing a home. Some of these are direct out-of-pocket expenses and others are included in the services of the professionals that you choose to work with and the products you choose for financing your home. For simplicity’s sake, I’ve tried to separate these expenses into two areas: up-front costs and auxiliary expenses.

Although this list is by no means comprehensive, let’s take a look at some of the up-front costs that you may encounter:

Appraisal costs: Some lenders have automatic appraisal systems built in to their corporate framework. CMHC and Genworth collect Real Estate industry data, as well as general data from the transactions that they insure, to assess general market values for properties. What this means is that the appraisal cost for insured transactions – whether the property value is approved “electronically” or by traditional walkthrough processes – is included in the insurance fees that are added to your mortgage principal balance.

Where appraisals are more commonly required in the case of your mortgage being less than 80% of the value of the property. Appraisal costs can vary from region to region and city to city; it’s best to ask your mortgage professional or realtor who they would recommend and what their fees are. To be fair between small towns, large cities, time-sensitive requests, long driving times, the type/size of the property, and how busy the market is at the time that you require an appraisal, the cost could range between $250-1000.

Mortgage Loan Insurance: This is an embedded cost that is most often ‘tacked’ on top of your mortgage balance if you decide to purchase a new home with less than a 20% down payment. The costs of mortgage insurance run on a tiered basis: to learn more, search over here for CMHC’s or Genworth’s premiums.

Deposit: Although we had discussed part of this concept yesterday, the ‘expense’ side of the deposit is that you will have to provide your realtor (or sometimes the vendor’s lawyer) with a partial downpayment as a good-faith deposit against your purchase contract. These funds can form a part of the total deposit that you intend to make in completing the transaction.

Land Registration Fees (Land transfer tax in Ontario or Toronto. Currently, there is no land transfer tax in Alberta, etc… ): This expense has different names and costs in every province and region. You may have to pay this provincial or municipal charge as your transaction closes in some provinces or territories. Your best advice is to check with your mortgage broker, realtor or lawyer for the most accurate figures.

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Surveys, well certificates, water tests , septic tank etc…: For rural properties, lenders will generally require a septic and well water potability certificate proving that your home will have adequate and safe well water access.

Legal Fees and Disbursements: A lawyer (or Notary in some provinces) will be required to help process the land transfer from the vendor to you as well as securing your mortgage on the property’s land title. for you. Your lawyer/notary will also pass on the costs for other expenses such as condo estoppels certificates, surveys, courier costs, etc… that may be involved in the processing of your transaction.

Title Insurance: Your lender or lawyer/notary may suggest title insurance to cover potential loss caused by defects on the land title of the property.

Property Insurance: Your home must be insured with basic building coverage to protect against fire, earthquake, etc. If you are purchasing a detached or semi-detached home, you will likely purchase a home insurance policy that covers the exterior, the building itself, the interior and contents. In a condominium or strata unit, the monthly fees generally include the exterior/building insurance while you may want to look at content insurance to protect your ‘stuff’. These policies are commonly quite inexpensive in the $150-200/year range.

Some other ‘auxiliary costs’ that you may run into:

  1. Gardening/Snow clearing equipment
  2. Service Connection Fees: Utility set-up for gas, water, electricity, TV, internet, telephone, etc…
  3. Monthly Condo fees (if applicable)
  4. Appliances: Sometimes, a property purchase is negotiated where the purchase excludes the appliances – will you have to purchase new ones? Are the current ones old and ready to get recycled?
  5. Window Coverings – did you request these to be included in the price?
  6. Decorating Materials – paint, wallpaper, flooring and basic tools
  7. Moving expenses – even if it’s pizza and beer for friends that help with a local move, there’s a dollar cost to moving.
  8. Air conditioning unit or dehumidifier, – depending on the age of the property and the region that you live in, this may be an expense that you will have to incur
  9. Renovation and repair expenses: If they’re minor, you’re likely to account for this expense out of pocket; it’s best to include simple tools like a hammer and some screwdrivers in this category. If they’re larger or involve some of the major services in the building, you could look at doing a purchase-plus-improvements mortgage. For a complete re-model or major addition to the property, you could also look at a construction draw mortgage.

WOW – that’s a LOT to think about and account for! Now it starts to make sense in terms of why your lender caps your debt-servicing ratios at specific ranges!

After even the mental exercise of this, it goes without saying that it can cost a lot of money to own a home! Spreadsheeting your anticipated expenses and budgets can help you get a better mental picture of where things sit as well as help you to avoid unwanted surprises.

STEP 4: What type of property should you purchase?

Through this step, you will find yourself happiest when you analyze this question while taking both your current AND your future needs into account.

Some items to think about:

  • Style of property: Condo, Townhouse, duplex/multi-plex, detached home, ranch?
  • Size requirements – How many bedrooms and bathrooms are necessary to meet your needs?
  • Special features: style of home, floorplan layout, air conditioning, storage or hobby space, parking needs? Special features to save energy and reduce your ecological footprint?
  • Location, location, location! What type of lifestyle are you wanting? Close to downtown, your office, public transportation, family and friends? Suburban home close to schools and parks? Acreage living?

Build your own home from the ground up? Purchase a new home that’s ready to go? Previously-owned? What are the differences? Some pros and cons about these different types of properties…

Building your own home from the ground up:

  • There is a huge amount of flexibility in terms of size, style, design, location, quality of materials and quality of craftsmanship: you choose and you can follow the process step-by-step
  • Although this is the most flexible and personalized process, it can take up a lot of your time and energy making all of the choices and following up with your homebuilding team. Depending on market conditions, you may run into material and labour supply issues.

New Home purchase:

  • Modern design: up-to-date with the style, colours, materials and features
  • You can personalize certain design choices to your tastes
  • Up to date on current building codes and standards; cheaper on maintenance
  • Builder warranty programs – these usually cover defects and minor repairs within the first 6 to 12 months of your ownership
  • New home warranty – Some provinces and third-party insurance companies offer new home warranties that extend beyond the builder warranties between 1-5 years after your possession date.
  • Taxes – When purchasing a new home from a builder or developer, the purchase is subject to GST . Having said this, you may be eligible for a rebate for homes that are less than $450,000. To learn more about this, please refer here.
  • Extra costs: landscaping, changes to utilities and modifications to the building structure or adding a driveway and garage, special assessments from the condo corporation, etc…

Existing homes:

  • You know what you’re buying – the home is in place and you are able to inspect it for quality, possible repairs and renovations, etc… Also, the property is likely in a developed area where you can see access to schools, amenities, roads, etc.
  • Landscaping is usually complete and more mature than having to plant it yourself.
  • Home could be antique or historical, allowing a certain allure to fit with your needs and tastes
  • Taxes: unless the home has recently been heavily renovated, you will not have to pay GST/HST
  • Possible redecoration and renovation, replacement of systems (heating, plumbing, etc.)

SO many options! Based on your personal needs and some soul-searching, mixed with some hunting around with your Realtor, you will no doubt find a home that fits the majority of your criteria – these lists will quickly reduce to a few specific options. Sometimes your current budget doesn’t support your homebuying needs and you’ll have to start out with a more modest property in the beginning.

Next article preview: Creating your team of Professionals to help you through the homebuying process! Also: now that you’ve got your team and wants in place, how to really find the home of your dreams AND budget!

Happy house-hunting!

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