Becoming a new homeowner is a financial milestone worth celebrating. But before you claim the keys to your dream home, you need to plan for mortgage payments, bills, and other regular expenses.
With the down payment issued and mortgage payments pre-authorized, you may think this is it — your new home is set for move-in, with no other last-minute or surprise expenses. Well, not quite.
Between the mortgage plan and move-in, there are a few more things to prepare for that facilitate a smooth transition in property ownership and set you up for years of comfortable living.
What are closing costs?
A lot of homeowners often fail to account for closing costs. These “hidden costs” typically cover legal fees, taxes, property inspection and survey, insurance, and other expenses related to the transaction and securing your real estate investment. Because of this, the truth is, there’s nothing last minute about them — they’re designed to finalize the sale and facilitate new property ownership.
Any savvy buyer needs to factor closing costs in their budget early, starting with their offer and down payment and the total mortgage payments.
How much are closing costs?
Depending on the property location, type, and whether its a new construction or an existing build, the cost of closing expenses can vary. Each property is valued differently, which informs its sale price, required repairs and upkeep, taxes, and cost to insure.
With the weight of the down payment and monthly mortgage payments, many first-time buyers fall into the trap of underestimating required closing costs because they’re solely focused on the purchase price. Typically, closing costs require 3 to 4% of the purchase price — a few thousand extra is usually needed for legal fees, taxes, and other expenses.
Acquiring a new home already requires a significant financial commitment, so many buyers often find themselves in a tight spot. A good way out — and which allows you to finalize the sale — is to opt for a no-cost mortgage. This means that the lender will front the closing costs and factor these into the monthly mortgage payments.
Types of Closing Costs and When to Pay
Before Closing: Property Valuation and Inspection
As a homeowner, you need to know how much your new home is worth. Property value is what drives the sale price, but uncovering issues that impact the quality of the build and its condition can help shave off the purchase price, saving you money in the long-term.
While these types of closing costs are optional, they are useful in ensuring a solid investment and can be factored into a no-cost mortgage to reduce additional upfront expenses.
1. Property appraisal and home inspection
While no savvy buyer will make an offer without seeing the property, a professional home inspection guarantees a thorough check to certify that it is in good condition. It uncovers anything which might need repair and tells you whether the additional expense is worth it, or if it simply makes the purchase even more expensive.
Your lender may also order a property appraisal to learn the value of the property because they are also investing in it by financing your loan. Similarly, a property survey identifies restrictions that impact property value. These reports allow you to make an informed and fair offer.
2. Title insurance
Both your lawyer and lender may recommend a title insurance policy as part of a no-cost mortgage. Think of this closing cost as an investment — it protects both you and the lender from title fraud, as well as zoning violations, and property defects you may not have been aware of, and have to pay for later to repair.
3. Property and mortgage life insurance
Every homeowner needs a comprehensive property insurance policy to replace their assets in the event of a disaster. Most lenders require property insurance in advance of transferring the mortgage fund, to shield them from the cost of loss or damage early on.
Similarly, a mortgage life, critical illness, or disability insurance pays towards your remaining mortgage payments. It allows you and your family to keep your home in case of devastating events that impact your ability to work.
Closing Day Costs
Upon closing, you can expect the transfer of property ownership — and the keys to your new home. All it takes is securing certain crucial costs, such as taxes and property fees, which also can be factored into a no-cost mortgage to streamline your expenses.
1. Land transfer taxes and GST or HST
Like any expense, you can expect to pay taxes when buying a home. Both provincial and municipal governments typically charge separate land transfer taxes to facilitate changes in property ownership. The amount usually depends on the purchase price, with rebates or incentives for first-time buyers.
GST and HST are also typically charged on new builds or substantially renovated properties; you can recoup these taxes through available new housing rebates and may ensure their hassle-free payment through a no-cost mortgage.
2. Property taxes, utilities, and other fees
On top of mortgage payments, owning a home comes with recurring expenses that go towards upkeep and quality of life. For one, property taxes are charged annually, and utility fees need to be paid regularly to ensure property upkeep.
Depending on the circumstances of the sale, the seller may have already prepaid these fees before closing, and you will have to reimburse them for the portion of the costs paid from the closing date forward — when ownership is transferred, and you move in.
3. Mortgage default insurance
Mortgage default insurance is required if your down payment is below 20%. For lenders, this is a guarantee in case you default on your mortgage for any reason. The coverage amount and corresponding premiums depend on the risk involved, such as the property value and purchase price. The premium can be added to a no-cost mortgage to streamline closing costs.
Congratulations — the house is finally yours. You have successfully navigated the mortgage pre-approval, selected the best terms to suit your financial needs, and have paid the applicable taxes and fees through a no-cost mortgage. You have proven to be a capable homeowner, and it’s time to focus on ensuring the upkeep and long-term comfort in your own home. Keep an eye out for final closing costs that need to be settled for a smooth transition to your new home:
1. Legal fees
Don’t forget to pay your lawyer! Along with your mortgage lender, they helped you successfully navigate the home-buying and property ownership transfer process. Their legal fees are a core part of closing costs. They may also bill you for disbursements or expenses they initially paid for on your behalf.
2. Estoppel Certificate fee
This closing cost applies to condo owners and the certification of the financial statements of the condo corporation. These statements detail common condo fees and the status of the seller’s payments, the reserve fund, and other financial information related to the ownership of the unit. Your lawyer will need this certificate to proceed with the closing transaction.
3. Moving expenses
Where are you moving from, and how much are you bringing with you to your new home? Typically, moving expenses consist of hiring professional movers and moving truck rentals. Before moving, make arrangements for porting over or applying for new utility connections, mail forwarding, replacing old and worn-out appliances, and minor renovations or upgrades to make the place truly your home.