The one constant in the Toronto real estate market is change. Recently, there were significant changes to the mortgage rules announced by the federal government which may make it more difficult for homebuyers to qualify for a mortgage. In another change, the provincial government announced changes to the provincial Land Transfer Tax Rebate for first time homebuyers increasing the amount of the rebate. Finally, two of the major chartered banks announced modest increases to mortgage rates. Keeping up with these changes makes it more challenging for homebuyers, particularly first time home buyers.
For many homebuyers, understanding these changes and attempting to enter a hot housing market with a tight inventory of listings will require them to make major decisions without considering all of the consequences. One important consideration that may get overlooked is whether or not a homebuyer who has signed an Agreement of Purchase and Sale will have enough funds to close the transaction on the closing date. Buyers, particularly inexperienced first time homebuyers, may get caught up in the excitement of chasing their dream home without preparing a budget ensuring that they will have enough funds to close the transaction can avoid a last minute panic and a potential problems. In my experience, many first time buyers are often unprepared for all of the additional costs that they will have to pay in order to close their purchase. This column will look at some of these costs.
If buyers are arranging a high ratio mortgage, their lender will require that the mortgage be insured. The cost of the insurance premium is an additional closing cost which will have to be paid by the borrowerThis can amount to thousands of dollars. Many homebuyers do not understand that the insurance premium is added to the amount of the mortgage. Most importantly, they fail to realize that the actual amount of funds advanced by the lender to the borrower will be reduced by the amount of the insurance premium plus PST. Another major expense on closing will be Land Transfer Tax. This is paid on closing and is based on the purchase price. In addition, if the property is located in Toronto , there is a municipal land transfer tax in addition to the usual provincial land transfer tax. Again, this can amount to thousands of dollars, even if the buyers are first time buyers and qualify for the Land Transfer Tax Rebate.
Depending on the lender, there may be conditions in the mortgage which require the payment of debts such as credit cards or lines of credit. If this is the case, the lender will not fund the mortgage on closing unless there is proof that these debts have been paid in full. There are also adjustments between the buyer and the seller on closing. These are typically for property taxes and condominium fees. Depending on how much the seller has paid, the buyer will have to reimburse the seller on closing for any amounts that have been prepaid by the seller for the benefit of the buyer. Another expense on closing is legal fees and disbursements and title insurance. These can be quantified to some extent. Finally, if you are buying a newly constructed home from a builder, there are usually builder adjustments to the purchase price which can amount to thousands of dollars which also must be paid on closing.
As can be seen, closing costs are significant and must be accounted for before the Agreement becomes firm. Careful planning with a team of professionals including your lender, mortgage broker, realtor and lawyer can avoid nasty surprises on closing.