Buying a property
1. Make a realistic budget
1. Don’t solely depend on your bank!
Banks want you to borrow the maximum funds that you can repay. They don’t care if you’re struggling and cutting back on other expenses to make your monthly mortgage payments. The only thing that matters to them is that you make these payments.
The mortgage contract protects banks: If you are unable to repay your mortgage, the bank can seize your property, resell it and keep the money to pay off the loan.
This is why banks like to lend the maximum amount of money possible. It’s in their interest – not yours. It’s unwise to rely solely on your bank to determine the value of your property.
2. Make a list of all expenses
Buying a home and furnishing it is expensive. The following checklist will help you calculate your expenses.
- Inspector fees
You must hire an inspector or other expert to verify the current condition of the home before the sale can be finalized. A basic inspection costs around $500. If you need additional tests (vermiculite, pyrite, water quality, septic tank, fireplace, etc.), then you may end up paying in the thousands. All these fees apply to any home on which you make an offer.
- Transfer tax
This is a special tax that municipalities impose on property buyers (“Welcome tax” in Quebec). It’s about 1% of the value of the home, payable a few weeks or months after purchase. Check the rate with the municipality.
- Legal fees Property transactions must be overseen by a legal professional. In Quebec, this is mostly done by a notary. Prices vary from one region to another, but expect a minimum fee of $1,500.
- Tax adjustment
If the seller paid the taxes (municipal or school) beforehand, then you must reimburse the seller during the transaction.
- Sales tax(es) Some properties (for example, a home belonging to a business, or newly built) are subject to sales tax(es), which must be added to its price.
Moving and furnishing expenses:
It’s rare for new home owners to not carry out renovations. When making a renovation budget, you should include extra expenses in case renovations take longer than expected or something goes wrong. A good example would be replacing a sink and then discovering the plumbing must be replaced as well.
You might be tempted to do several renos at once, such as repainting and redoing the floors. This may save time but not costs. A rule of thumb: Your renovations will cost double your estimate.
- Decoration and other purchases Whether buying a new kitchen table, blinds or a lawnmower, furnishing a new home means a number of small purchases that, when added up, can be costly.
- Moving Make sure you have a truck and, if necessary, movers for the day you move in.
- Utility transfer There may be fees for disconnecting and reconnecting utilities and services such as Internet, television, telephone, etc. Contact your service provider(s).
Regular, ongoing expenses for owners:
- Mortgage This is usually the primary expense of buying a home
Don’t forget that interest rates can rise by the time you need to renew your mortgage. Take the time to shop around for the lowest rates. You don’t want to get stuck in a situation where, in five years, you need to sell your property because interest rates climbed 2%. Important: A lower interest rate can save you thousands of dollars! To find out how, see our Get the best interest rate section.
- Mortgage insurance
If your down payment is not enough (less than 20% of the total mortgage), then you will probably need to buy mortgage insurance. The price usually varies between 0.5% and 2.9% of the total mortgage.
Most financial institutions will adjust your mortgage rate to cover the insurance. For example, if you interest rate is 3% and your insurance is 2%, your mortgage payments will be calculated at a rate of 5%.
- Taxes Depending on the municipality, you will have to pay different taxes (municipal, school, State, etc.).
- Home insurance
Your home must be insured against fire, theft and other emergency situations (property damage, natural disasters, etc.).
- Maintenance and co-ownership fees Make sure you save enough money for repairs and maintenance. Costs vary according to each property, depending mainly on its age. Some home owners invest 1% of their home’s value yearly for major renovations. That’s $4,000 annually on a home worth $400,000.
If you buy a co-property, you will probably have to pay condo fees, which include maintenance and repairs. This is usually a fixed monthly payment..
- HBP repayment The HBP (Home Buyers Plan) allows you to use your RRSP to buy a home. If using the HBP, you will have to re-invest a minimum of 1/15th of the money you withdrew from your RRSP, every year.
3. Determine your budget
The best way to make a realistic budget is to… make a budget. Most buyers don’t and are unaware of all the expenses they will have to pay after purchasing their home.
Divide your budget in two:
The portion of your savings you will use as down payment on the property. Subtract all expenses for buying, moving and furnishing from your total savings. Whatever remains is the down payment for your new home.
The portion of your income you will use to make regular payments for your home. It covers taxes, insurance and other regular expenses.
Once you’ve calculated how much money you have available for your down payment and mortgage payments, you’ll have better idea of which properties you can afford.
Next step : Get pre-approved for a mortgage.