You have worked so very hard to save your down payment.
Your savings account or RRSP or TFSA have a very nice balance showing. Or perhaps you chose to go an alternate route? Perhaps your parents or another relative were able to help you out with a gift.
Or perhaps you have decided to use your line of credit. Or maybe it is a mix of all of the above. However you did it, you have the full 5% that is required for the down payment.
You eagerly look forward to getting out there to find your dream home until you are stopped dead in your tracks when your lender tells you that you need an additional 1.5% of the purchase price for the closing costs. What? Why? Let’s look at answering that shall we?
Why do the mortgage insurers and lenders require these additional funds?
Legal fees. Your new home purchase will have to be completed by a lawyer. Their job is to ensure the title is transferred to your name, the funds are distributed properly, that you understand the terms of the mortgage you are signing and generally to protect you and your interests. The costs for this can vary greatly but generally $1,200 seems to be an average. I always think there are two things you do not want to try to save money on: a tattoo and a lawyer. Thankfully we have a plethora of well qualified professionals in Central Alberta.
Property taxes. Depending on which time of year you take possession of your new home and how you choose to pay your taxes, you could be required to pay one full year of property taxes upon closing.
Calculating this amount is one of the roles of your lawyer. For example, if you take possession of your home and the previous owners had pre-paid the property taxes then it is only fair that they are reimbursed for the taxes pre-paid after you take possession.
Another possibility exists when you choose to have the lender include the taxes in your mortgage. Many lenders require one full year of taxes to be held in your tax account.
In addition to this they will take the future taxes owing with each mortgage payment from day one.
Property taxes vary based on your municipality. Anywhere from $900 to $10,000 depending on your home’s assessed value. Having the closing costs in your bank account protects you as we have already ensured you are prepared for this possibility.
One way to mitigate the large property tax amount owing is to sign up on your city’s property tax plan. The property taxes are divided equally by 12 and taken directly from your account on the last business day of the month. When this option is chosen you will have to pay any amount owing the previous owner but generally not the full year.
Title insurance. Some lenders require Title Insurance in addition or in lieu of the Real Property Report. The Title Insurance is an insurance policy that protects residential or commercial property owners against losses related to the property’s title or ownership. What does it cover?
Unknown title defects, existing liens, encroachment issues – such as your garage needs to be removed as it is actually on your neighbor’s property.
Title fraud. Errors in surveys and public records – the cost is generally only $249 + GST and will be collected by your lawyer.
Property insurance. This can be set up with your insurance provider but it is a legal requirement that you have home insurance in place. It can be paid monthly of course, but it is important to remember.
Other fees that come up include moving fees, utility deposits or charges and the interest adjustment from the lender.
So, as you can see the 5% down is not the only thing you should save for. The costs that can come up at the end have to be paid too. Until next time my mortgage minions!
Jean-Guy Turcotte is an accredited mortgage professional with Dominion Lending Centres Regional Mortgage Group.