Once you have made the decision to buy a home in Calgary Alberta, do your homework. Have some idea about where you would like to reside (neighborhood), the type of home you want to live in – like a condo, semi-detached or detached home. How many storeys do you want or need – one, two, split level? Do you need the basement developed? Is the yard important? Also, have you considered having a new home built versus a home that is all ready for you right now? Of course, no matter your preferences about the home, you’ll need to be prepared to give a down payment on the purchase. Aside from the down payment there are other costs to think about as well. We’ll cover most of the common costs to expect in today’s blog.
The biggest outlay of cash when purchasing a home is your initial down payment, although it is not really an expense – it will remain your equity in the property after purchase. For purchasers with strong credit and the ability to debt service an extra loan, there is the potential of borrowing your down payment. Aside from this buyers should be prepared to put a minimum down payment of 5 percent of the purchase price.
When writing the offer you will need to present with it a deposit which will be held in trust. The amount of the deposit will vary but usually requires a minimum of $5,000 to $ 10,000 or higher depending on the purchase price. This amount counts toward your total down payment.
NOW THAT YOU HAVE SAVED UP FOR YOUR DOWN PAYMENT WHAT OTHER COSTS SHOULD YOU BE PREPARED FOR
COSTS INVOLVED IN THE PURCHASE PROCESS
Home Inspection (costs vary but range from $ 400 to $ 700)
A home inspection is especially important to identify any potential maintenance issues whether minor or major that would require repair. If the property inspection detects issues that are unsatisfactory to you as the buyer, a negotiation may be done to have the issue repaired prior to your possession or you may agree to accept the property ‘as is’ with a negotiated price reduction if you are prepared to make the repairs yourself. It is important to know that if you are obtaining a mortgage for your home purchase and you do negotiate a price reduction to cover flaws found in the home inspection, you will not necessarily receive that money in your own pocket. Why? Because the lender will only lend on the actual purchase price.
For example: You purchase a home for $ 300,000 with the minimum of 5% ($15,000) down and 95% ($285,000 + High Ratio Insurance Premium) mortgaged. After the home inspection you negotiate a price reduction of $5000 to cover an issue with the roof. The purchase price is now $295,000; the down payment will now be reduced to $ 14,750 and the mortgage will be $280,250 + the High Ratio Insurance Premium. Because 95% of the price reduction is realized in a lower mortgage amount, you will only actually only realize $ 250 cash towards your new roof.
High Ratio Mortgage Insurance Premium
Although you will not be expected to pay this premium up front and therefore will not affect your cash position or closing costs, it is a cost of borrowing that is worth mentioning. This premium will be added to your mortgage amount and will be amortized along with the repayment of your mortgage.
This is also referred to as mortgage default insurance and protects your mortgage lender if you default on the mortgage. It is a requirement that you have this insurance if you are putting down less than 20 percent of the purchase price. The one-time premium is calculated on your mortgage amount and varies depending on your down payment percentage. The chart below summarizes the most common premiums encountered:
Down payment Insurance premium
5 % to 9.99% 4.00%
10% to 14.99% 3.10%
15% to 19.99% 2.80%
Mortgage Life insurance
This is an optional life and/or disability insurance that you bank or mortgage broker will offer you at the time that you are signing your mortgage documents. This type of insurance will have a monthly premium attached and the premium will be determined by your age as well as your risk factors. Risk factors could include your current health, whether you are a smoker and whether you have a high-risk occupation or hobbies (sorry sky-divers).
Now that you have made the decision to purchase a home, make sure your payment is protected against the risk of illness, accident or loss of life.
A 2011 Manulife study of middle-market Canadians shows trend of insurance ownership, including a low percentage of health insurance ownership. Of those surveyed: 43% have no individual life insurance, 79% have no individual disability insurance, and 87% have no individual critical illness insurance
Here is a quick test to determine if you and your family are protected:
How much life coverage (group benefits) do you have with your employer? (ex. 1 x salary)
Do you have disability coverage through your employer? (income replacement)
How much unsecured debt do you have?
Current term policies? Deduct final expenses (average $25K)
New Mortgage Balance?
Coverage surplus or deficit?
Do you need both incomes to maintain your current household debt? (TDS and GDS)
For further information on life insurance, talk to a life insurance broker.
Property Appraisal (costs start at $300 and go up depending on the value and location of the property)
A property appraisal will most often be required by your mortgage lender if you are putting 20% or more down payment; or in any case if you are purchasing a foreclosure or on a private sale/purchase. As the property is the security for your mortgage the appraisal verifies the market value and the condition of the home for the lender.
Condo Document Review
It is a good idea when purchasing a condominium to have a professional review the condo bylaws, meeting minutes and financials for the property you want to purchase. Most often a condo document review will reveal changes being made to the bylaws or condominium policies that could affect your lifestyle (such as pet or age restrictions), financial issues that exist or may exist in the future that could result in special assessments (requirements of owners to make lump sum cash payments to fund shortfalls in the reserve fund for major repairs), and/or large increases to the monthly condominium fees.
Lawyer fees start at around $900 but will vary dependent on what the law firm you use charges. In addition the to the lawyers fee, you will incur the Land titles Transfer of Land fee of $ 185.00; Land Titles Mortgage Registration fee which is based on the mortgage amount (Land Titles charges $50.00 + .50/$1,000.00 for value of mortgage); title insurance is required by the lender in many cases and disbursement costs plus GST on total of all of these items. On a bright note, Alberta is one of the only provinces in Canada that does NOT currently charge a land transfer tax which in many cases is 1% of the purchase price or more.
Another additional adjustment your lawyer may need to collect from you would be a possible property tax adjustment between you and the current owner of the home you are purchasing, or a property tax hold back, or adjustment by the lender if you are putting less than 20% down and the lender requires you to include the property taxes in your monthly mortgage payment. As property taxes are paid in June for the calendar year, part of your taxes are paid in advance and part are paid in arrears. The amount of the hold back/adjustment will depend on what time of year you take possession of your home. This could be done a couple of ways:
- The lender could have the lawyer do a lump sum hold back for the amount they estimate they’ll be short at the time the property taxes come due.
- The lender will increase the amount of the monthly property tax component for the first year until they have made up the estimated shortfall.
If permitted by your lender, you may also pay your property taxes directly to your city or municipal district. It is a great idea to pay your property taxes by monthly installment as it reduces the amount of adjustments and holdbacks by your lawyer. The monthly installment plan helps with budgeting the taxes over 12 months rather than requiring you to save up a large payment once per year.
Here is the link to the City of Calgary Property Tax Application
Whether you hire a moving company or do it yourself and rent a moving truck, it is not free, there may be damage that occurs to your belongings and may need to be replaced or repaired.
Home Owners Insurance
It is always recommended however, if you are placing a mortgage on your new home, your mortgage lender will require that you have adequate home/fire insurance on the property.
Comprehensive insurance coverages protects your/your property against damage from fire, smoke, storms, vandalism, theft and other hazards. It may also include temporary living expenses if your home is not habitable after a covered claim. You can also add an option to add coverage for valuable personal property, such as jewelry and musical instruments.
Just like shopping for the right home or the right mortgage, it is also a good idea to shop around for the best insurance policy. Talk to an insurance broker about different coverage and rates.
If you are buying a brand new home there are costs for landscaping, fencing, window coverings or even new furniture if you don’t have enough to fill it up. When buying a pre-owned home there is often something you want to do to change it, painting is a common one as well as changing locks.
Did you know you could qualify for purchase plus improvements which will allow you to add a portion of your improvements to your mortgage? Contact us today for information on this program.
As a homeowner, you will need to keep your property in good repair. A few common maintenance items are having the furnace cleaned and inspected annually, making sure your smoke and carbon monoxide detectors are working properly, keeping your plumbing fixtures in good operating condition can save you on water costs, yard and exterior maintenance.
Some lenders offer a home warranty program that is free to you for the first year and could cover repair or replacement of items such as your furnace, hot water tank, major plumbing or electrical issues. Contact us for more information today!
When planning for your new home, don’t forget to budget for the following which will vary dependent on the age and size of your home:
- heating your home
- water, sewer and electricity
- telephone, internet and cable
- security systems
Be prepared and ask questions when it comes to the cost of closing.
Contact JoAnne & Joseph Purcell at 403.612.5298