Chapter 3

The True Costs of Buying and Owning a Home

The total cost of home ownership goes well beyond the down payment and monthly mortgage cost. Here we will explain the basic financial outlays involved in buying, occupying, renovating and maintaining a home.

The deposit

deposit

The first bundle of cash that a first-time homebuyer will part with is called the deposit. In Toronto’s competitive housing market, the deposit cheque is often given to the home’s seller at the same time the “Agreement of Purchase and Sale”. We recommend giving a certified cheque or bank draft, to show the seller you’re serious about your offer.

The cheque will usually be for about five percent of the home’s value, but that’s just a guideline, and you might want to put down more or less. This means if you’re putting an offer on a $750,000 house, you’ll typically need a $37,500 deposit cheque. The money will be held in trust by the listing agent’s brokerage until closing day, when it will be forwarded to the seller, less commission. In other words, the deposit will count toward your down payment. You’ll need to have this cash on hand—in a bank account where you can access the money and get a draft quickly if needed— to start the home-buying process.

The down payment

deposit

Next comes the down payment. Ideally, you’ll put a 20 percent down payment on your first home. This will qualify you for a conventional mortgage and will allow you to avoid paying mortgage default insurance.

If your down payment is less than 20 percent, you’ll have a high ratio mortgage and federal law will require you to buy mortgage default insurance, which guarantees the loan. We’ll explain mortgage default insurance later in this chapter, and in Chapter 4 we’ll talk about where to find the money for your down payment.

In Canada, the minimum down payment for homes under $500,000 is 5 percent. For homes priced between $500,000 and $1 million, the down payment is 5 percent on the first $500,000, plus 10 percent on the remaining amount. So, for example, the minimum down payment on a $750,000 home would be $50,000. For homes over $1 million, you must have a 20 percent down payment.

You’ll need this money on hand as you enter into the home-buying process.

The inspection

If the seller doesn’t have a pre-listing inspection report, you might decide to get a home inspection before buying the house. A standard inspection will cost between $300 and $600, depending on the size of the home; you could also spend much more for premium services. You can read more about how and why to get a home inspection in Chapter 2.

The closing costs

The next major set of costs that first-time homebuyers encounter will be the closing costs. These are fees associated with the legal and administrative work involved in buying your new home. According to the Canada Mortgage and Housing Corporation (CMHC), Canadian home buyers typically spend between 1.4 percent and 4 percent of the home’s purchase price on closing costs. On a $750,000 home, that amounts to between $11,250 and $30,000. Here’s how that breaks down:

|Municipal Land Transfer Tax (MLTT)

Since you’re buying In Toronto, you’ll pay a municipal land transfer tax of between 0.5 per cent and 2.5 per cent, depending on the cost of the property. You can see the full schedule of municipal rates here, and you can use the Toronto Real Estate Board’s land transfer tax calculator to find out how much you’ll owe.

On a $750,000 home, you’ll pay $11,475 in municipal land transfer taxes. As a first-time home buyer, you’re eligible for a municipal tax rebate that also varies with the cost of the home. This RateHub calculator can help you estimate your rebate. In this case, the rebate would be $4,475, so your net municipal land transfer tax would be $7,000.

|Provincial Land Transfer Tax (PLTT)

Since you’re buying in Ontario, you’ll pay a provincial land transfer tax of between 0.5 per cent and 2.5 per cent, depending on the cost of the property. You can see the full schedule of provincial rates here, and you can use the Toronto Real Estate Board’s land transfer tax calculator to find out how much you’ll owe.

On a $750,000 home you’ll pay $11,475 in provincial land transfer taxes. As a first-time home buyer, you’re eligible for a provincial tax rebate that varies with the cost of the home. Use this RateHub calculator to estimate what you’ll save. In this case, the rebate would be $4,000, so your net provincial land transfer tax would be $7,475.

|Legal Fees and Disbursements

You’ll need to hire a lawyer to handle the legal and administrative work involved in buying your new home. You’ll also pay a fee for the lawyer’s professional services, and you’ll also reimburse him or her for the money he or she spends on registry searches, copies and other paperwork (these are called disbursements). In Toronto, you can expect to pay between $1,000 to $2,500 for these services, including title insurance. You’ll learn more about title insurance in the next section, and you can learn more about what a lawyer does in Chapter 2.

|Title Insurance

Title insurance protects you if you encounter a problem with your title. For example, you might find undischarged liens on your property, which means someone else has used the home as collateral on another item. Other potential problems include title fraud, ownership disputes and unpaid property taxes. This insurance is optional, so you’ll want to discuss the pros and cons with your real estate agent and your lawyer. If you decide to buy title insurance, the cost will be linked to the value of your home. CIBC estimates that title insurance costs an average of $250.

|Mortgage Default Insurance

If your down payment is less than 20 percent of the total price of your home, you will have a high ratio mortgage and Canadian law will require you to purchase mortgage default insurance. This insurance protects the lender if you can’t make your mortgage payments.

Premiums range from 1.8 percent to as high as 4.5 percent, depending on the purchase price of your home and the amount of money you’ve got set aside for a down payment. Use this CMHC calculator to estimate your total insurance premium.

On a $750,000 home with a 10 percent down payment, the rate will be 3.8 percent and the total premium will be $20,925. This amount can be added to the principle of your mortgage, which means you won’t have to pay it up front – but you’ll pay the same interest rate on your premium as you do on the rest of your mortgage. Alternatively, you can pay the premium as part of your closing costs. If you buy an energy-efficient home, you may qualify for a 25 per cent premium reduction from CMHC.

In Ontario, you’ll pay eight per cent provincial sales tax on your mortgage default insurance, which must be paid in full as part of your closing costs. In our example – a $750,000 house with a 10 per cent down payment – the PST will cost an additional $1,674.

|Interest Adjustment

You’ll start paying interest on your mortgage the day your lender extends the loan (and effectively pays for your house). If your closing date is May 8, but your first mortgage payment isn’t due until June 1, you will be required to pay interest on the mortgage from May 8 – June 1. This is called your mortgage interest adjustment, and it must be paid as part of your closing costs, since it won’t be included in your first mortgage payment.

This is a difficult amount to estimate and not everyone needs to pay an interest adjustment, but budget least $300 for it, just in case you do.

|Appraisal Fee

Most lenders will conduct an appraisal before they give you a mortgage. They do this because they want to make sure the property is worth what you say it’s worth. This way, if you default on the mortgage and they foreclose on the home, they can get their money back.

Sometimes, your lender will cover the appraisal fee. Sometimes, you will pay it yourself. If you pay it yourself, the money might be paid directly to the appraiser assigned by the lender, or as part of your closing costs. It is important to ask your mortgage broker or the bank’s mortgage specialist whether the fee is included. Typically, it will not be included when you use a broker. The fees can range from $200 to $500, depending on the size of the home and the property.

|Property Taxes

Municipalities collect property taxes from homeowners to pay for municipal services like snow removal and road repair. Property tax rates range from 0.5 per cent to 2.5 per cent of your home’s market value, and they are calculated once a year. Use this calculator from the City of Toronto to estimate the property tax rate on the home you’d like to buy.

You can prepay your property taxes with one cheque at the beginning of the year, or you can pay in quarterly or monthly installments. Some lenders will allow you to wrap your property taxes into your mortgage payment, then your lender will pay the municipality on your behalf.

In some cases, the seller will have prepaid the property taxes for the year, and you will have to reimburse the seller for the remainder of the year’s taxes. For example, the property taxes on a $750,000 Toronto home will be just under $5,200 per year. If the seller has prepaid the property taxes and you buy the house halfway through the year, you’ll have to reimburse the seller $2,600.

|Federal and Provincial Taxes

There are no taxes on resale homes. If you buy a newly built home, however, you’ll pay a 13 per cent Harmonized Sales Tax comprised of the federal Goods and Services Tax (5 percent) and Ontario’s provincial sales tax (8 percent). On a new $750,000 home, you’ll pay $97,500 in HST.

If your home costs less than $450,000, you might be eligible to claim a partial rebate for the federal GST. Ontario also offers a tax rebate of up to $24,000. These rebates can be complex, so consult with your real estate agent or lawyer before banking on them. Alternatively, you can read the federal government’s detailed info sheet here.

|New Home Warranty

If you are buying a newly built home, you may choose to purchase a new home warranty to protect you from problems that arise when builders make mistakes. The cost of the warranty depends on the price of your home. This enrollment fee table from Tarion will allow you to estimate the costs.

On a $750,000 home, the enrollment fee for a new home warranty from Tarion will be roughly $1,375. This money can be paid up front as part of your closing costs, or rolled into your mortgage

The moving costs

Consider whether you’re comfortable moving yourself, or whether you’ll hire movers to do it for you. According to a 2011 article in The Toronto Star, moving a one-bedroom apartment can cost as much as $1,000, while moving a three-bedroom home can cost double that. Contact some moving companies for quotes. Your agents should have a roster of moving companies to recommend, and The Canadian Association of Movers offers a searchable database of member movers. This money will come out of your pocket after you’ve closed on your new home.

The utility hook-up fees

Before you move into your new home, you’ll want to make sure you’ve arranged for electricity, heating and water. When you set up your utility accounts for the first time, many providers will ask for a deposit or charge you a one-time fee to hook up your utilities. This amount will depend largely on the type of utilities you’re using and the companies you’re doing business with, but be sure to set aside at least $300 for these costs.  

The home decor, repairs, maintenance and renovations

In some cases, your home inspection report will reveal issues that need to be addressed as soon as you finalize your purchase of the home. More likely, though, you’ll want to make cosmetic changes, which can range from an inexpensive coat of paint to a full kitchen makeover. You’ll also need to furnish your new home, whether that means a new dining room set or a bed for the spare room. All of these investments are pricey, so keep them in mind when considering which home to buy.

Also consider the ongoing cost of home repairs and maintenance. The general rule of thumb: expect to spend two to four percent of the home’s value in repairs and maintenance each year. Use this excellent calculator from Home Warranty Reviews to estimate your annual maintenance costs (but keep in mind it’s in U.S. dollars).

A note on language

Under the Ontario Real Estate Business Broker’s Act, an agency relationship exists between yourself and the real estate company of your choice, otherwise known as the brokerage. The individual you choose to represent your interests in the purchase of your first home could be either a broker or sales representative acting on behalf of the brokerage they are registered with. For the purposes of this guide, we’re going to refer to these people as real estate agents, because that’s the term most people use. But remember: Legally, your agent is the brokerage, not the person.