5 Costs to Be Aware of When Buying a House
The cost to buy real estate can add up, and if you aren't prepared for these expenses, it can come as quite the surprise that can make or break buying your dream home. When you know what costs to expect, you will be ready to make an offer and have all the funds necessary when you find your perfect home.
Buying real estate in British Columbia requires help from several professionals. The fees for their services add to the cost of purchasing a home. Out-of-pocket costs include other expenses such as transferring property title and are important to be aware of.
The purchase price is your starting point and is mainly absorbed into a mortgage when financing a real estate purchase. Expenses not included in your mortgage should be set aside when buying a property.
The following are five costs to be aware of when buying a home. These fees must be paid by the buyer before or at the time of completion.
1. Down Payment
A down payment is an amount the buyer contributes to their real estate purchase. This amount cannot come from a loan; however, there are a few creative ways to come up with your required down payment, especially for a first-time homebuyer.
Help from family is one of the most common ways to come up with the cash needed for a down payment. An able family member may be more than happy to help with this life investment.
In British Columbia, the minimum down payment to purchase a property is 5% for properties under $500,000. A purchase price between $500,000 and $999,999 requires a minimum of 10% down payment. Anything over $1,000,000 is required to pay 20% down.
The Government of Canada outlines how much you need for a down payment. Their website also contains several other informative articles helpful for Canadians when buying a home.
When a down payment is less than 20%, you will encounter an additional cost. Lenders are required to have default insurance in place that will need to be purchased through CMHC. This insurance protects the lender in case your mortgage is unable to be paid and goes into default. Default insurance will cost 2.8% to 4% of your total mortgage.
CMHC explains the cost of default insurance in their useful loan-to-value table that includes the percentage of premiums charged for the amount of your down payment.
The higher your down payment, the lower your mortgage and monthly payments. Speak with a mortgage specialist to discover the best down payment for you.
2. Property Transfer Tax
Property Transfer Tax is a tax that needs to be paid to transfer ownership and title of any property in British Columbia. Transferring a property title through BC's Land Title Registry involves several steps and documents that your lawyer will manage.
This amount will be due at the time of completion and is calculated on the fair market value of the property you are buying. General Property Transfer Tax is payable on all properties valued under $3,000,000.
The percentage of General Property Transfer Tax fluctuates with property values and is charged as follows:
- 1% of property value up to and including $200,000
- 2% of property value greater than $200,000 up to and including $2,000,000
- 3% of property value greater than $2,000,000
When a property is valued over $3,000,000, an additional 2% is added to the value over $3,000,000.
For example, if your purchase price is valued at $900,000, your General Property Transfer Tax would be $2,000 for the first $200,000 and $14,000 for the remaining $700,000 for a total of $16,000.
Should you purchase a property valued at $3,500,000, your Property Transfer Tax would be $2,000 for the first $200,000, $36,000 for the next $1,800,000, $30,000 for the following $1,000,000 and $10,000 for the remaining $500,000 for a grand total of $78,000.
Property Transfer Tax will likely be the most expensive fee when purchasing real estate and is essential to be factored into the cost of buying your home. You do not want to be caught off-guard at the time of completion when this fee is due and payable in full.
The Province of British Columbia explains Property Transfer Tax, available tax exemptions and more information on buying a BC home at www2.gov.bc.ca.
3. Home Inspection
A home inspection is one of the best things you can do to protect your financial investment and feel secure with your purchase. When the real estate market does not favour buyers "subject to conditions" added into a Contract of Purchase and Sale, a property inspection is still an option.
In a seller's market, have your building inspection performed while the property is accepting showings before offers are due. Your house inspection will then be taken care of before your real estate agent presents your offer to purchase. Even if your offer is not accepted, it is worth paying the cost of a home inspection over the potential risk of buying into future headaches and problems.
Have your real estate agent add a subject-to-home inspection clause into your Contract of Purchase and Sale in a buyer's market. Give yourself enough time to arrange an appointment with a trustworthy inspection company.
The benefits of a home inspection are many. A property inspector will uncover any foreseeable problems that need immediate or future attention. This small cost and real estate buying service can save you thousands of dollars and stress from unexpected repairs.
Red flags or significant costs can be brought to the seller's attention and possibly fixed before possession, or a price reduction could be another option. If the home is in extremely poor condition, you will have side-stepped a possible money pit and regrettable investment.
A home inspection report usually runs at approximately $500 and will depend on the size and square footage of the house or townhome. A condominium inspection will typically cost less than a house or townhouse as the strata will have an up-to-date building envelope and engineering report for the property.
GST is possible when you buy a home but only payable in a few scenarios. New construction and a property that has been 90% renovated and considered 'new' are subject to Goods and Services Tax. GST charged is 5% of the property's fair market value.
GST is due and payable through your lawyer at the time of completion. Should you qualify for a partial exemption, this tax must be paid upfront and the paperwork submitted once property ownership has been transferred.
Eligibility for a new housing rebate is explained through The Government of Canada on their GST/HST Housing Rebate page.
5. Notary Public or Lawyer Fees
The cost of legal fees is necessary to register and transfer property ownership with BC's Land Title Office.
Outside of this mandatory cost, hiring a notary public or lawyer before you write a Contract of Purchase and Sale can be extremely helpful and save you from potential legal real estate pitfalls.
Obtaining and being satisfied with legal advice is often included in the Contract of Purchase and Sale as a buyer's condition. When this condition is not an option for a seller's market, have your lawyer look over the property title and possibly your contract before it is presented.
Your lawyer or notary may have advice or suggestions that can help you avoid any legal or contractual mistakes when you are ready to make an offer to purchase.
Legal fees are variable and include the cost of several legal services and documents their office and team handle for you. Your real estate transaction details will determine how involved your lawyer needs to be, influencing the total cost of your legal or notary fees.
A mortgage will increase legal fees as your law firm manages and prepares necessary mortgage documents at the time of closing. Your lawyer also handles the transfer of funds from buyer to seller.
Your law firm will incur disbursements, basically office fees, filing and registration fees with LTO (Land Title Office), strata forms, strata property costs, insurance binder (for your mortgage), courier costs photocopying and more. Disbursement fees may or may not be included in your basic legal fees.
Legal fees usually start at $1,200 to $1,400 for a standard real estate purchase.
Adjustment fees are paid through your lawyer or notary. They include any costs or expenses the current seller has paid for in advance and past the completion date. Adjustment fees can consist of property taxes, city utilities, strata or manufactured mobile home pad rental fees, adjustments for an existing tenant or other fees paid in advance.
Closing Costs When Buying a Home
A few other potential closing costs are important to know when buying a home. These expenses are explained further in What Are Closing Costs?
Hiring a Real Estate Agent is Free
A buyer does not pay realtor fees to hire and work with an experienced real estate specialist. Real estate commission fees are fully paid by the seller at the time of completion; this service is invaluable to buyers.
Before searching for your dream home, hire a professional real estate agent. Your realtor will ensure you are well taken care of and can save you money, time and stress. LoyalHomes.ca has a professional group of real estate experts and is available to answer any questions you may have.
There are many pieces involved when buying a home. See Buying a House in British Columbia to prepare yourself and learn more.
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