November is national Financial Literacy Month. The goal is to protect and educate consumers about financial services and this year’s theme is Financial Literacy Across Generations. This is the third in a series of Ask Joe columns that will touch on real estate decisions buyers and sellers face at different times in their life.
I’m buying my first home. What are some of the costs I should plan for, besides the purchase price?
Chances are you’ll have run the numbers to determine what you can afford by way of mortgage amount and payments. But
Some first-time homebuyers may overlook the fact that the price paid for a home is just one of its many costs. That’s why it’s so important to understand the full cost of buying a property.
It’s useful to separate the additional expenses into three categories: pre-closing costs, closing costs and after-closing costs.
A home inspection is the most widely recognized pre-closing cost. It may be seen as an optional expense but it’s also a smart one is because a qualified home inspector, engineer or contractor can identify underlying problems with a home’s major systems, like heating and electrical. If you’re thinking of saving some money by skipping an inspection, ask yourself, “Can I afford to learn about major, costly problems after I take possession?” If you’re buying in a rural area, you should also have the septic system inspected and water testing conducted for the good of your health.
Your lender may require, as a condition of financing, that you pay for an appraisal or survey of the property to ensure the home’s value matches its sale price.
Closing costs typically make up the bulk of the additional expenses. In Ontario, a land transfer tax is up to 2 per cent of the purchase price. In Toronto, an additional tax of up to 2 per cent applies. As a first-time buyer, you should talk with your real estate agent about whether you are eligible for a refund of the land transfer tax.
Legal fees will need to be paid to handle the documents and contracts involved in the purchase of a home. Your lawyer will conduct a title search on the home to ensure the seller can actually sell the property and that there are no liens against it. They will also register the deed and mortgage for you.
You may also need to refund the seller for pre-paid expenses — property taxes, maintenance fees, utilities, hot water heater rental fees.
Three different insurance policies round out the closing expenses. You’ll need mortgage insurance if your down payment is less than 20 per cent of the sale price. You’ll need home insurance. And title insurance will protect you against title fraud, errors in surveys and encroachment issues with neighbours.
After-closing costs include moving expenses. Some gas, hydro and water companies charge a hook-up fee and you’ll need to pay if you want to forward your mail from your old address.
Then you’ll need to factor in what you want to do with the dated kitchen and broken fence. If you want to renovate or take care of some repairs identified during the home inspection, it will add to your costs. A fresh coat of paint, some window coverings, or perhaps a shiny new fridge and stove also add up. Understanding the full cost of buying a home will help to budget for these final touches. The latest edition of RECO’s consumer newsletter, RECOnnect, has a useful overview of these costs. You can find it on the consumer side of RECO’s website, reco.on.ca, under ‘Publications and Resources’.