How Much is Getting a Mortgage Going to Cost Me?
A mortgage alone can seem like a scary 25 to 30 year commitment, but it’s important not to overlook the costs associated with purchasing real estate. A rule of thumb is to factor in anywhere from 1.5%-4% of the purchase price to set aside for closing costs. For a property priced at $750,000 this is upwards of $30,000 which may seem crazy high, but when you factor in the items below it starts to make a lot more sense.
Legal fees – A lot of people try and skimp on these but they are a necessary cost that represents a mere fraction of the total purchase price of the property you are buying, and put simply, when it’s one of the biggest purchases you’re ever going to make, don’t you want it done right? You can generally use a lawyer or notary of your choice and fees tend to land in the $1200-$1500 range for a new purchase (which includes things like document preparation, title registration, title insurance, property insurance binder etc.). Note that this is just one side of the transaction, so if you are also selling a property there will be separate fees for that transaction. It should also be noted that the more expensive the property, the higher these fees can climb and the more complex the financing the more the cost can rise. In the legal world time is money, so the longer it’s going to take to get everything in order, the more it’s going to cost.
Property Transfer Tax (PTT) – Property Transfer Tax in BC is a government land tax that was introduced in 1987 as a “temporary” speculation tax (thanks Vander Zalm) but it doesn’t look to be going away any time soon. To be clear this isn’t a bank or broker fee – it’s tax that goes straight to the provincial government. It also CANNOT be added to your mortgage balance, so you must have cash available to pay whatever amount is due.
But are there exemptions? Yes, sort of. There is an exemption available for First Time Buyers purchasing a property they plan to live in (click here for the full criteria https://www2.gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax/exemptions) but it’s only applicable on properties up to $500k ($750k if you’re buying a brand new build). There’s a partial exemption on existing properties priced between $500-$550k (or between $750-$800k for new builds) but it’s on a sliding scale and after the threshold then fuhgeddaboudit. And when you think about it, it’s pretty easy to spend $550k on a resale property just about anywhere in the Lower Mainland these days.
GST – Applicable on new construction properties only, this cost can generally be added to your mortgage balance if you choose, however you have the option to pay it outright in which case it would form part of the closing costs.
Other Fees (as applicable) – Real estate agent fees, mortgage origination fees, appraisal fees, title insurance fees, just to name a few.
Adjustments – This can be one of the most confusing aspects of closing costs because it’s often the least explained. Adjustments are basically allowances for costs the seller has already incurred or prepaid. Some things are billed yearly, and others monthly, and completion dates tend to be all over the map. Therefore, if the seller paid the full property taxes for the year as of July 1st and you are closing on the home September 15th, then the seller is only responsible for taxes from January 1st to September 14th. This means the property taxes will be adjusted, with a credit to the seller for September 15th-December 31st and a charge to you for the same period.
Similarly, if they’ve prepaid any annual utilities/sewer costs etc. these will be adjusted with a charge to you. Also, condo fees will see the same treatment. For example, if the seller paid for the month of September and you move in the 15th then you’ll owe the pro-rated condo fee portion from Sept 15th to Sept 30th.
So back to our $750,000 example at the beginning:
Legal fees $1500
PTT $13,000
Appraisal fee $500
Adjustments $2000
Total: $17,000
Statement of Adjustments - This is the document that your lawyer or notary will provide to you before you come in for your signing appointment. It will have an amount on it which shows the balance you need to bring in by cheque (or transfer to their trust account) to complete on the purchase. It will include the remaining down payment required, less any deposit paid, plus closing costs and it will be your responsibility to cover this amount from your own resources. If the cash is coming from the sale of another property happening at the same time, then the lawyer/notary will reflect this on the statement.
Questions? Let’s talk.