Buying your first home is an exciting time. Every home viewing is a chance to picture yourself in a new space. Imagining the first meal you are going to cook, having friends over, and starting a family. As with any dream, it takes planning to get there.
In all this dreaming, you’ve undoubtedly been brought back to reality when you start thinking about your mortgage. You have probably plugged the numbers into countless mortgage calculators, looking for the best rate.
While you are thinking about finances, there is one often overlooked aspect of the home buying process: the closing and incidental costs.
Your down payment will be the most significant expense, but there are other costs you should consider. The Canada Mortgage and Housing Corporation (CMHC) estimates that 1.5% to 4% of the purchase price will cover legal fees, land transfer taxes, and other purchase costs.
It’s best to know these costs, so you’re ready when the time comes to pay them. Here are some of the things you should budget for in the home buying process.
Buyer beware. It’s all about knowing what you are getting into before you buy. A home is no different. That is what makes a home inspection an essential part of the home buying process for many Canadians.
A home inspector evaluates the home you want to purchase to uncover potential issues. They’ll generally check critical areas, including the electrical and plumbing systems, foundation, and roof. They deliver a report that breaks down their findings, including aspects of the home that may require considerable renovations or replacements.
The CMHC recommends that you include a home inspection as a condition when you make an offer. It allows you to walk away from the purchase or negotiate a lower price with the seller.
Depending on the home’s square footage, the cost could range from $500 to $1,000, according to estimates from The Ontario Association of Certified Home Inspectors. Rates vary across Canada, but these numbers give you a good sense of budgeting.
Homebuying comes with a lot of paperwork. That paperwork needs to be reviewed by a lawyer to make the purchase legal. A real estate lawyer should be retained to review all the documents and facilitate the legal transfer required to purchase your home. Legal fees vary from province to province and from city to city, but you can expect to pay a minimum of $700, but that number could be over $2000, depending on the cost of your property and any complications that may arise.
Many provinces and municipalities charge a land transfer tax that you must pay upon closing.
Depending on where you live, taxes can range from 0.5% to 3% of the property’s purchase price. Most provinces use a tiered system, so lower-priced homes have lower tax rates.
Many provinces refund all or part of the land transfer tax if you are a first-time homebuyer.
Don’t forget about sales tax. When buying a newly constructed home, you have to pay sales tax. Typically no sales tax is paid on a previously lived-in home.
If your down payment is less than 20% of the home purchase price, you must purchase mortgage loan insurance. It is to protect the lender against default on the mortgage. Mortgage default insurance is calculated as a percentage and applied to your mortgage amount.
Even for a turnkey home, you may want to make cosmetic changes—factor in the cost of paint, brushes, and the other supplies you’ll need. If they were not included in the purchased home, you might need to invest in new appliances. On the other hand, you may want to undergo a larger renovation like a kitchen update or a bathroom makeover, both of which could increase the value of your home.
Moving is expensive. Even if you choose to go the DIY route, you need to factor in storage fees, renting a truck, boxes, tape, supplies like ramps and dollies, and, of course, pizza for everyone who helps out. Once you move in, expect fees for utility hook-ups to be added to your first bills in the new home.
Your bank or mortgage lender may ask you to have an appraisal done. An appraiser provides a professional opinion about the market value of the home. An appraisal fee is generally between $350 and $500.
Mail forwarding is often a forgotten cost. Even when you think you have changed all the addresses, there are always a couple of essential pieces that you may fail to update. You can get your mail forwarded to your new address for a small fee.
Your home is typically the largest purchase you are ever going to make. You want to make sure that your investment is protected. Multiple forms of insurance will ensure that you and your family can afford your home even in the event of unforeseen events.
Mortgage insurance products are available to help you in times of trouble. Should you lose your job, become injured or disabled, become critically ill, or pass away, mortgage insurance may pay the balance owing on your loan.
Remember though that the policy’s beneficiary is usually the mortgage company and not you or your loved ones. Funds from a mortgage insurance policy can be used only to make mortgage payments and for no other purpose. You don’t typically need to purchase this insurance coverage to be approved for a mortgage.
Another way to help ensure that your investment into your dream home is protected is through life insurance and critical illness insurance. Critical illness insurance can serve as a financial safety net for you and your family in the event that you are diagnosed with a critical illness, such as cancer or cardiac disease. It can provide the additional financial support you need to protect your family’s finances and lifestyle, even if you are unable to earn an income.
Securing a life insurance policy with the right amount of coverage can provide the peace of mind of knowing your loved ones won’t be left with outstanding debt, including a mortgage.
It can ensure that they can continue to pay for the home without your financial contribution.
Unlike mortgage insurance, the beneficiary can be a loved one, and it can also cover non-mortgage costs, like funeral and final expenses.
Canada Protection Plan is a leading provider of No Medical & Simplified Issue Life Insurance. We are here for your life and critical illness insurance needs. Having the right insurance policy can help cover mortgage payments, debts, and other important future expenses like education and legacy gifts.
Budgeting For Your First Home
As you can see, there is a lot to factor into your home buying budget. Be sure to reach out to people who have gone through the process to help explain their experiences with these costs. If you prefer professional help, a financial planner may have the expertise you are looking for to dig deeper into the home buying process.