When saving for your next home purchase, your down payment is not the only cost you’ll need to consider. Additional closing costs, such as those outlined below, add up and may leave you in a financial bind if you don’t adequately prepare for them.
Contribution to property tax account
Some lenders require that you pay one-twelfth of the projected annual taxes each month. This payment would be built into your monthly mortgage obligations, and the lender would set up a separate tax account and remit the funds directly to the municipality at the appropriate time each year. Normally, taxes are payable in June or July of every year, although they are calculated based on the calendar year (January 1st to December 31st). Some municipalities require an advance part-payment in February of each year, and the balance in July of that same year.
If the lender makes the automatic monthly property tax payment a condition of mortgage approval, make sure that you inquire as to whether interest is going to be paid on your tax account to your credit, and if so, ask about the interest rate. The interest paid is normally lower than that paid on deposit accounts. The reason that some lenders require monthly payments is to minimize the risk of you not having sufficient funds to pay the taxes every year. If this happened, the property could conceivably be put up for tax sale after several years in arrears, and compromise the lender’s security.
In most cases, lenders will give you the option of being responsible for paying your own taxes directly after a year. Try to negotiate this option, at worst. At best, attempt to have the property tax contribution requirement waived entirely. Alternatively, maybe in your situation you consider it to be a worthwhile “forced savings” plan. If you are paying a portion of the projected property tax every month, you will have to build that expense into the costs related to your mortgage.
New home warranty program fee
This fee is either built into the price of your home or added separately. It is normally related to the cost of your home, and there is a maximum fee. If it is added separately, you will need to budget for this expense.
Provincial mortgage filing tax
A fee is charged for filing a mortgage in the land registry, and for transferring the title of the property. These filing fees usually range from $50 to $100, but can cost even more.
Legal fees and disbursements
You are responsible for paying the lawyer for legal fees as well as out-of-pocket disbursements that he or she incurs relating to the preparation and filing of the mortgage documentation. Disbursements would cover such things as property searches, photocopy expenses, couriers, and other costs associated with the preparation and registration of the mortgage. The disbursement costs would also normally include the provincial mortgage filing tax–the fee referred to above. It is normal practice for lawyers to deduct the legal fees and disbursements directly from the money to be advanced under the mortgage. In addition, you would obviously have to pay your lawyer to do the transfer of the property.
Sometimes, lenders give you a choice of one of several law firms, or they may specify one particular firm they want you to use. Other times, the lender will permit you to use a lawyer of your choice. In all cases you are responsible for the legal fees and disbursements. If you are permitted to use the same lawyer to do both the mortgage and transfer, there can be savings on fees and disbursements, as there is some duplication of expenses, and efficiency of scale.
Other government taxes
You will have to pay the federal Goods and Services Tax (GST) of seven per cent on any services relating to your residential real estate purchase. In some cases, you will have to pay provincial sales tax as well. If you are buying a new home, you would have to pay GST, but receive a partial rebate of the GST if the purchase price is under $400,000. The effective GST rate would therefore be about 4.5 per cent of the purchase price in most situations. There are exceptions to this rule, so check in advance what formula applies in your situation.
Mortgage pre-payment penalty
If you are moving from an existing home and have to pre-pay a closed mortgage, you have to budget for the penalty. This could be three months interest, or the interest rate differential–generally the greater amount of the two. The amount could be nominal, but you need to budget for it.
Due to the competitive marketplace, some lenders will help you pay the penalty in order to get you to make a contribution to this cost to get you to transfer your business.
Moving expenses
Don’t forget to budget for moving costs. Make sure you get estimates and information packages from at least three to five companies. Consider the middle estimate–selecting a low-ball price is not necessarily the best decision. Since professional movers can be expensive, attempt to negotiate a lower price if you are moving at the slow time of the month. Find out how long the mover has been in business and obtain references. Check the amount of insurance for loss or damage you are covered for, and consider obtaining additional insurance. Check for complaints that have been registered with the Better Business Bureau. In the end, you may wish to rent a truck and move the goods yourself, if that option is feasible.
