Prop​er​ty​wire​.ca

You have found the per­fect place to pur­chase and now you are thrilled with the ser­vice you have received. Unfor­tu­nately, you need to shat­ter your won­drous illu­sion when you learn about the hid­den costs of pur­chas­ing a home.

Hid­den costs seem to be an unpleas­ant fact in busi­ness these days and they apply to the real estate and mort­gage indus­tries as well.

“I think any good agent should be mak­ing buy­ers award of all of costs they have to deal when mak­ing a pur­chase,” says Barb Sukkau, pres­i­dent of the Ontario Real Estate Asso­ci­a­tion (OREA). “Real­tors in gen­eral are fairly well edu­cated on these items and the buyer needs to be pre­pared for hid­den costs. I do think it’s the respon­si­bil­ity of the real­tor to let them know.”

The issue of hid­den costs may be more crit­i­cal for first-time home buy­ers because they’re gen­er­ally green when it comes to mat­ters of real estate. Also, says Sukkau, they tend to have the bare min­i­mum down for that first home, so costs that are hid­den or extra may be even more over­whelm­ing for them.

For exam­ple, on fixed-rate mort­gages – the kind obtained by two-thirds of Cana­di­ans – there are “shock­ing” hid­den costs to those who need to pay out their mort­gage early, says inde­pen­dent Toronto mort­gage plan­ner David Larock. “You may be shocked when you see the penalty charged by your lender,” he says, “and even more so when you real­ize that you could have avoided most of that cost by sim­ply choos­ing another lender offer­ing the same inter­est rate.”

That, he says, is why he spends time rail­ing against the pow­ers that be for changes to Canada’s mort­gage dis­clo­sure rules. He’s hop­ing Con­ser­v­a­tive Finance Min­is­ter Jim Fla­herty will follow-up on his 2010 bud­get promise to address the issue.

As it now stands, the major banks can get away with big penal­ties because they do not have to dis­close their method of cal­cu­lat­ing mort­gage penal­ties, says Larock. While these penal­ties – Larock says they are often dou­ble or more that of other lenders – don’t sur­prise him, it’s the cus­tomers, who assume the banks are giv­ing them fair terms that do.

Larock encour­ages real estate agents to do their due dili­gence and inves­ti­gate the dif­fer­ences in mort­gages being offered by banks and by non-bank lenders. It is nat­u­rally in every agent’s best inter­est to ensure their refer­rals are sound and that they are one hun­dred per cent com­fort­able rec­om­mend­ing the ser­vices of cer­tain lenders.

“Do (your) own research because mort­gages are a part of real estate,” Larock advises. “If you’re a real estate agent who is well inten­tioned, put in a lit­tle time in to know what they are talk­ing about.”

Sukkau recently expe­ri­enced this “hid­den cost” issue when list­ing the home of a young mil­i­tary cou­ple. A trans­fer prompted the need to sell their home and Sukkau hoped the bank might show clemency on the penalty given that the cou­ple was mov­ing to a mil­i­tary base in an effort to serve the coun­try. That, how­ever, didn’t hap­pen. The cou­ple had to pay the bank a $7,500 penalty and because they didn’t have enough equity in the house, the cou­ple took their home off the mar­ket and decided instead to rent it out.

“It did adversely affect them,” says Sukkau of her clients. “It’s an excel­lent, but unfor­tu­nate, exam­ple of a hid­den cost that home buy­ers wouldn’t be aware of. I think its some­thing that will become more of an issue. We may see CREA (Cana­dian Real Estate Asso­ci­a­tion) pick­ing up on this as a lob­by­ing item. The penal­ties are awfully high. When you think about it, is it a fair way to treat consumers?”

Clos­ing or hid­den costs vary depend­ing on the price of the prop­erty, but are gen­er­ally esti­mated to be 2% or 3% of the pur­chase price. Expect to rec­om­mend that clients should ear­mark at least a few thou­sand dol­lars for these costs.

Here, thanks to CMHC, is a list of more unusual or lesser-known costs:

Mort­gage appli­ca­tion fee — Some lenders may charge a fee to process your mort­gage appli­ca­tion. How­ever, with the highly com­pet­i­tive nature of the mort­gage indus­try, many will waive the fee entirely, espe­cially if you have other accounts with them.

Mort­gage broker’s fee — If you use a mort­gage bro­ker to find you a lender, you may be charged a fee which is payable at the time of clos­ing when the mort­gage trans­ac­tion is com­plete. In many cases, bro­kers are paid directly by the lenders, so you should ask the mort­gage bro­ker about who pays the fee.

Mort­gage insur­ance — If you have a high-ratio mort­gage, the gov­ern­ment requires that it be insured against default and that you pay the cost of insur­ance. The cost to you ranges from .51 to 2.90 per cent of the mort­gage amount and is added to the mort­gage principal.

Prop­erty and title insur­ance – Besides high-ratio mort­gage insur­ance,  mort­gage lenders require your client to have prop­erty insur­ance in place. This insur­ance cov­ers the cost of replac­ing the struc­ture of your home and the pre­mi­ums depend on the value of your home, accord­ing to CMHC. The lender may also rec­om­mend title insur­ance. For a home worth $500,000, the cost would be about $350

Appraisal fee — While it’s ben­e­fi­cial to know how much any prospec­tive house your client is look­ing at is worth in order to nego­ti­ate price, home appraisals are also used to pro­tect the lender’s inter­ests. It’s likely a lender will ask for a rec­og­nized appraisal in order to com­plete a mort­gage. Usu­ally, the cost of an appraisal ranges from $250 to $350. How­ever, some lenders will pay for the appraisal fees to get the business.

Home inspec­tion — an inde­pen­dent look at the house and prop­erty can cost in the $350–500 range for most single-family homes. Home inspec­tions are rec­om­mended to iden­tify if there are any other poten­tially costly expenses – issues not vis­i­ble to the naked eye – that may impact the costs and upkeep of the home.

Prop­erty sur­vey — always a good idea, but not always car­ried out.  A land sur­veyor can make sure the buyer is get­ting the prop­erty they think they are buy­ing.  A sur­veyor can prop­erly install prop­erty mark­ers on the cor­ners of the lot.  With those, the buyer will pre­cisely know the boundaries.

Water test­ing — for prop­er­ties not on a munic­i­pal water sys­tem, most – if not all – financ­ing insti­tu­tions require the water source to be tested to ensure it meets stan­dards for human con­sump­tion.  Some areas also have com­pounds in the water the prospec­tive buyer may wish to know about.

Sta­tus cer­tifi­cate fee — When mak­ing an offer to pur­chase a con­do­minium, it’s a good idea to ensure an offer is con­di­tional upon obtain­ing and hav­ing time to review an Sta­tus cer­tifi­cate. This fee (not applic­a­ble in Que­bec) applies when buy­ing a con­do­minium or strata unit and could cost up to $100.

Land trans­fer tax — Land trans­fer tax is spe­cific to each province and is a per­cent­age of the pur­chase price, usu­ally 0.5%. How­ever, provinces such as Alberta and Saskatchewan have no land trans­fer tax, while oth­ers offer a full or par­tial exemp­tion for first-time buy­ers.

Legal Fees — A lawyer will help pro­tect your clients legal inter­ests and nego­ti­ate the terms of any offers made. Legal costs will depend on the com­plex­ity of the trans­ac­tion and the lawyer’s experience.

Pre­paid prop­erty tax or util­ity bills –  If a clos­ing date is mid month, a seller may have already pre­paid taxes or util­ity bills. Buy­ers should be pre­pared to reim­burse the seller for pre­paid prop­erty tax and util­ity bills should they request it.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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