Finances are an important part of home buying. When looking to buy a home, a home purchaser will consider the funds that they have available to apply to a down payment; and will consider future ownership costs, like regular mortgage payments, regular insurance and utilities payments, annual property tax payments, etc. To avoid unpleasant surprises, a purchaser should also budget for several costs that they will incur during the home buying process, in addition to the down payment. Some of the costs that a purchaser will need to pay before they take title to their home may include the following:
Deposit
When a purchaser enters into an Agreement of Purchase and Sale (i.e., the contract with the seller setting out the terms of the transaction), they will pay a deposit towards the purchase price of the home. The deposit is usually around 5% of the purchase price, paid into the trust account of the seller’s lawyer or the seller’s real estate broker. The deposit payment is usually due within 24 hours of the seller’s acceptance of the buyer’s offer to purchase.
Inspection
The cost of a home inspection can vary depending on many factors, like the type of home, the size of the home, the age of the home, and any special concerns that a buyer would like their inspector to spend time investigating. Often, home inspections cost between $300.00 and $1,000.00. The payment is usually due to the inspector before or just after the inspection is completed.
Mortgage Fees – Appraisal, Mortgage Insurance, Broker Fee
A mortgage lender may have a home appraised to determine the amount of the mortgage loan that it will give to a purchaser. Appraisal fees are usually around $300.00. Often, a lender will have the purchaser pay the appraisal fee by taking the fee from the principal amount of the loan. For example, if a purchaser’s mortgage principal were $300,000.00, and the appraisal fee were $300.00, the amount of the mortgage advance actually available to put towards the purchase price would be $299,700.00. A purchaser should speak with the lender to determine whether the appraisal fee is taken from the principal amount of the mortgage, or whether the fee is paid in some other way.
A mortgage lender will usually require a purchaser to purchase mortgage insurance when the purchaser’s down payment is less than 20% of the purchase price. The Canada Mortgage and Housing Corporation’s resource at this link explains, in greater detail, what mortgage insurance is, and how premiums are calculated. The premium is often taken from the principal amount of the mortgage (as described in the appraisal discussion, above), but is sometimes repaid in instalments, added to regular mortgage payments. A purchaser should speak with the lender to determine whether the insurance fee is taken from the principal amount of the mortgage, whether the purchaser is required repay the fee in instalments, or whether the fee is paid in some other way.
If a purchaser is working with a mortgage broker, they should speak with the broker to determine whether they will need to pay a broker fee, and, if so, when the fee is due.
Three Amounts Brought to Real Estate Lawyer
1. Land Transfer Tax (LTT)
In Ontario, almost all property transfers are subject to LTT. LTT is calculated on the value of the consideration of a transfer. In most home purchase transactions, the value of the consideration is the purchase price of the home.
The rate of LTT increases as the value of the consideration increases. The Province of Ontario’s resource at this link gives more information on how LTT is calculated on home purchases. A purchaser may be eligible for a rebate of some of the LTT payable, if they are a first-time homebuyer. A purchaser should speak with their real estate lawyer to determine the LTT payable on their purchase, and to determine whether they are eligible for the first-time homebuyers’ rebate.
The purchaser’s lawyer will be required to remit the LTT to the Ministry of Finance on the purchase closing date. Therefore, the purchaser will need to pay the LTT amount into their lawyer’s trust account before the closing date.
2. Legal Fee and Disbursements
The legal fee for the purchase transaction will depend on the lawyer that the purchaser hires, and the details of the transaction. Disbursements are the costs, other than legal fees, that the real estate lawyer incurs in completing the purchase transaction. Disbursements on a purchase transaction usually include the cost of a title search, the title insurance premium for the purchaser and their mortgage lender, the Land Registry Office’s registration fees for the registration of the title transfer document and mortgage document on title to the property, a tax certificate, an execution search on all parties to the transaction, real estate software fees, etc.
Many real estate lawyers will request that the purchaser pay the legal fee and disbursements into the real estate lawyer’s trust account before the closing date.
3. Balance Due on Closing
Usually, the week before closing, the purchaser’s real estate lawyer will receive from the seller’s real estate lawyer a document called a Statement of Adjustments. A Statement of Adjustments breaks down the total amount of money that the purchaser’s lawyer must send to the seller’s lawyer on the purchase closing date. For example, the Statement of Adjustments might begin with the purchase price, then subtract the amount of the deposit that the purchaser has paid, then add a credit to the seller for any payments the seller will have made toward the property before the closing date that the apply to a period of time that continues beyond the closing date (e.g., property taxes paid to the end of the year in which the closing date falls, and/or condominium fees paid to the end of the month in which the closing date falls). This amount is often referred to as the balance due on closing.
In addition to the LTT amount, the legal fee, and the disbursements discussed above, the purchaser will need to bring to their real estate lawyer the balance due on closing, minus the amount of any mortgage funds that the mortgage lender is sending directly to the real estate lawyer’s trust account.
Moving Costs
A purchaser may incur moving costs, like the cost of a moving truck, the cost of booking an elevator in a condominium building, the costs of utilities account set-ups, etc.
Conclusion
A prospective buyer should speak with their real estate agent, real estate lawyer, and financial institution to understand the costs that they will incur during the purchase transaction, and they should speak with their financial institution to ensure that they have access to the funds when they are required.
This blog post was written by Shannon Hogan, a member of the Real Estate team. She can be reached at 613-369-0369 or at shannon.hogan@mannlawyers.com.
