Closing costs, then some

You’ve done your homework – saved your down payment, met with your mortgage broker and are pre-approved for a mortgage, connected with a reputable realtor, and chosen a lawyer.

You’re off to a great start in the purchase process.

As you move forward, keep in mind that you’ll also be covering a few extra costs in addition to legal fees when your purchase is finalized. Being prepared for these closing costs in advance avoids last minute stress.

How do I budget for my closing costs?

If you are putting the minimum five per cent required to buy your home, your mortgage professional will explain that you need to have 6.5% on hand to cover your closing costs.

It is a good idea to gather estimates of these fees and expenses, so you are fully prepared.

Rule of Thumb: allow 2-3% of the purchase price to cover your closing costs

You will normally sit down with your lawyer about a week before your purchase completes to sign all the required documentation.

At that time, you will need to provide a draft or certified cheque to cover the balance of your down payment and closing costs.

The following list covers typical expenses you’ll encounter when buying a home:

  • Deposit — will have been made when you went firm with your offer. If you are selling and buying at the same time, make sure you have access to funds for this deposit
  • Realtor commission (if you are also selling a home)
  • Legal fees
  • Appraisal
  • Inspection
  • Property Transfer Tax
  • Property Tax Hold-back: If the lender is collecting and paying property taxes you may be required to pay to the lender an amount to ensure sufficient funds are available to pay the next instalment of property taxes when due. Property taxes are paid July 1 each year.

Some surprise expenses that people don’t account for can include:

  • Moving expenses
  • Appliances if not included in your purchase price
  • Decorating/updates
  • Repairs
  • Utility hookup fees
  • Tools, shovels, gardening equipment etc

One of the big-ticket closing costs that catches clients by surprise is the Property Transfer Tax.

Some provinces levy this tax whenever real estate changes hands. In B.C., this tax is calculated as a percentage of the purchase price of your property, so the more expensive the property, the larger the amount of tax paid.

It is key to know that there are several exemptions to this tax. First time home buyers may be exempt from paying all or part of the property transfer tax up to a fair market value of $500,000. There is a partial exemption for prices up to $525,000.

Exemptions are also available on newly-built home purchases up to a purchase price of $750,000.

In B.C., the tax is charged at a rate of:

  • One per cent on the first $200,000,
  • Two per cent on the portion of the fair market value greater than $200,000 and up to and including $2,000,000, and
  • Three per cent on the portion of the fair market value greater than $2,000,000.

For example, if the fair market value of a property is $450,000, the tax paid is $7,000.

It is important that you confirm with your lawyer that you are eligible for an exemption. There are nuances that may mean you do have to pay the tax, so you don’t want to be caught by surprise at closing.

As you are house hunting, do your homework on these closing costs. Keep a list or spreadsheet, and my suggestion is you budget a little high so you are not scrambling at closing.

A quick reminder – the B.C. Speculation Tax Declaration forms have come out in the mail. Take a second to complete the form online. They are due by March 31.

Hope you are enjoying Family Day.


Lowest rate not always best

I take calls on a regular basis that start with the question “What’s your best rate?”

My answer is never a quick one.

  • Not all mortgage lenders are created equal.
  • Not all mortgages are created equal.
  • The lowest rate available may not be the best rate for your particular situation.

In the mortgage space, lenders have subtle differences in their policies and products. Many offer a standard mortgage as well as a no-frills version. The no-frills option is generally price .05% lower than the standard product.

Based on a $500,000 mortgage, comparing 1.69% and 1.64%, the difference in interest cost over five years is about $1,160.

The no-frills mortgages come with the slightly lower rate and restrictions about how and when you can pre-pay the mortgage.

In the excitement of buying your home you might be certain that you will be in your new home for life. Or for five years at minimum.

Trading a standard mortgage penalty calculation for the no-fills option may come back to bite you later.

I’m working with a young couple that signed a no-frills mortgage three years ago with another broker. He was offered an amazing position in a different city, one that he couldn’t turn down.

They were shocked to learn that their mortgage is not portable to a different home, and are looking at a massive penalty to break their mortgage early.

They aren’t in the position to carry this home as a rental, so unfortunately are losing almost $20,000 on the sale of their home.

I’ve been working with another client for the last year that is in a situation where the value of the condo he bought has dropped, and he will have to come up with cash to pay out his mortgage if he wants to sell.

He has had it rented for the last 18 months because his employer transferred him to a different city.

Sometimes lender policies guide how I choose which lender to place my clients with. A common challenge right now is clients who own multiple rental properties.

Lenders calculate the rental expenses slightly differently. From time to time a lender with better rental calculation may have a slightly higher interest rate.

This may not be the best rate available, but it may be best rate for you if your numbers work based on their policies.

When I am answering the rate question, I try to get a good sense of my clients’ future plans.

Historically variable rate mortgages have outperformed fixed rate mortgages. At this point, we are in a situations where the variable rate mortgages are at a higher rate than the fixed rates that are available.

Taking the lower fixed rate might be tempting, but going with a variable mortgage may make more sense if you are looking at moving or even paying the mortgage out early.

Finding the best rate means finding the best rate for you. Take the time to make sure you understand the fine print – it can make a world of difference in the long run.

Buying new home is a race

Trying to buy a home in the Okanagan right now feels a bit like an episode of The Amazing Race.

Ideally, when you're buying a home, you take your time — save your down payment, get your mortgage pre-approval in place, make a plan, consider multiple options, then make an offer on your dream home.

It seems like clients can’t get in to look at homes quickly enough to make an offer, never mind take a night to consider if their potential dream home truly checks all the boxes.

During the last week, I’ve had six sets of clients trying to buy homes:

  • Two of them haven’t found anything they loved.
  • One couple was successful negotiating an accepted offer.
  • The other three have made offers on homes that went into multiple offer situations.

Of those three, two tapped out when they found that the houses they were interested in were selling for almost $50,000 over the list price.

The third couple went up to the $50,000 over asking and are the backup offer in case the first-place offer falls through.

All these couples have told me that their realtors are watching new listings like a hawk, and they are to the point that they are taking time off work to look at homes if they feel it might be close to the right fit.

As soon as a viewing is booked, they make a run for the house and hope that there is not already an offer being negotiated.

Another dynamic is that some sellers are waiting a few days and looking at all offers at the same time to see which one they want to accept.

I think this is part of what is driving prices up and contributing to the frantic environment potential homebuyers are facing.

Good for sellers, not so great for buyers right now.

If you are shopping for a home, my suggestion is to make sure you are crystal clear about your maximum price point. Have your pre-approval in place and have all of your documents to your mortgage person as soon as possible so there are no last-minute surprises.

One young couple I’ve been working with for a few months initially decided on a maximum price point. They knew what they had to do to get there.

After looking for at least four months, they have now realized they have to increase that price point to find anything even remotely close to what they would like to buy.

When they became frustrated at not finding anything they could afford, we revisited their application.

With a few small tweaks, they are now hunting for a home almost $100,000 higher than where they started. In their case, it is a matter of taking part of what they saved for their down payment and paying off a car loan.

Sometimes a fresh set of eyes can help you fine-tune your application.

If you have been looking for a bit and find yourself needing to revisit your pre-approval, it’s a great idea to reach out to your mortgage person to see if there are any changes you can make to put you into a better position moving forward with an offer.

If you are starting to hunt for a home now, make sure you have your financing lined up before you reach out to a realtor.

You need to be ready to go in case you find your dream home right away. Having your ducks in a row may mean the difference between being the successful purchaser or missing out on a new home.

New year, new mortgage

Happy New Year. With the start of each new year, it’s a great idea to spend a bit of time reviewing your financial situation.

  • Set some financial goals for the coming year.
  • Think a bit about what you accomplished last year.

For some people, this may include planning to buy a home. For others, it might mean taking a look at ways to reconfigure their finances to accomplish other lifestyle goals.

For some, particularly after a rocky nine months of COVID, this might be something you’d like to avoid.

If you are struggling with meeting your day-to-day expenses, it’s better to sit down and look at the overall picture sooner rather than later.

If you have creditors calling it can feel like you have the weight of the world on your shoulders.

Pick up the phone. Return their calls. For the most part, your creditors want to work with you to resolve any arrears. Most will make payment arrangements.

Maybe you’re doing OK. Maybe you’d like to do better. Have a nest egg in place. Plan for a holiday when things settle down.

A great starting point is to print out all of your bank statements for 2020. I’m a bit old school and like to see things on paper.

If your bank offers a program that tracks where you are spending your money, set it up so you can see where your money is going.

This may be a bit of an eye opener for you.

Maybe there are a few tweaks you can make to start putting a little more money away. I had clients who set up an Impulse Fund.

Every time they went to buy something (other than the necessities like groceries, etc.) they would ask each other if they truly needed it or if it was an impulse buy.

If it was an impulse buy, they would transfer the amount they would have spent into the impulse account. The first month they saved more than $300.

Maybe there are no impulse purchases in your budget. Maybe you are strapped.

If you are a homeowner and have equity in your home, refinancing may be an option to help you see a little daylight.

Under current mortgage rules, you can potentially refinance up to eighty per cent of the value of your home. As an example, maybe you bought your home a few years ago and owe $320,000.

Your home has increased in value and it is now worth $500,000. This means you have $80,000 in equity available.

My preference is always that people stay on track and pay down their mortgage.

However, life happens and if you are stretched thin between mortgage payments, loan payments, credit card debt, and a line of credit, a re-finance may help get you back on track.

Speak to your mortgage person to see if this might be the right option for you. A deep dive into your finances may offer up a few options to help ease the feeling of being stretched too thin.

If you would like to discuss the pros and cons of refinancing your home, feel free to call us.

We are happy to explain more about how the process works, and whether or not this is a good idea for your particular circumstance.

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit www.okanaganmortgages.com

Visit their blog at www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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