The Hidden Costs in Buying a Home
So you've finally found that perfect home that matches your pocketbook. Whether you are a first-time buyer or a seasoned one, it is important to remember that there are hidden costs related to most home purchases.
By far the largest cost is the purchase price of the home; there are, however, numerous direct and indirect expenses related to the purchase - and the home - that need to be paid. These additional costs can vary from one purchase to another. Here's just a sampling.
Goods and Services Tax
Under the old system, a five per cent federal Goods and Services Tax (GST) was collected on the sale price of goods and services. That being said, there were real estate transactions and services that do not require payment of the tax.
As a general rule, purchasers of homes that have been lived in or used did not pay the tax. If the home was new, and it would be your primary place of residence, you may have had to pay GST. You may also have qualified for a partial rebate, depending on the sale price, but often this rebate was signed over to the builder. GST also applied to many other services in the real estate transaction, including fees for appraisals, referrals, surveys and legal assistance. The tax was charged on these services whether or not the home you purchased was exempt from the tax.
Refer to information below for tax updates regarding HST for new homes and professional services...
Harmonized Sales Tax
For the government rationale behind the Harmonized Sales Tax and answers to consumer questions, visit: http://www.hstinbc.ca/
For comprehensive information regarding the HST and how it affects the cost of new homes and professional services, visit the Shelter Taxes section of the BC Real Estate Association's (BCREA) website: http://www.bcrea.bc.ca/sheltertaxes/hst.htm.
Harmonized Sales Tax and new homes
For new homes, under the previous system, only 5% GST was charged on new home sales. Under the HST, new homes will be subject to the 12% HST. The Canadian Home Builders Association has developed a fact sheet for information on how the HST works in the purchase of new homes.
To offset the increase in costs, the BC Government offers a partial rebate of the HST for new housing, intending that new homes up to $525,000 should bear no more tax than under the former PST system. Homes above $525,000 will receive a flat rebate of $26,250. New home sales over $525,000 will be impacted, as buyers will have to pay an additional 7% tax less the $26,250 flat rebate.
On November 18, 2009 the provincial government announced the HST transitional rules on housing which includes a threshold increase from $400,000 to $525,000, moving the threshold to above the median new home price in the province. According to the government news release announcing the transitional rules, the limit was increased due to feedback from consumers and the industry.
To read the BC government news release and backgrounder titled, Province Increases New Housing Rebate Threshold, click here. For the Ministry of Finance Tax Information Notice, Residential Housing New Housing Rebates and Transitional Rules for HST in BC, click here.
The Canadian Home Builders Association has developed a fact sheet for information on how the HST works in the purchase of new homes. Click here for HST for Home Buyers: How Will HST Affect Me?
HST and the cost of Professional Services
The HST will also introduce a new tax on most services provided by GST/HST registrants in BC. As such, service-providers like REALTORS®, home inspectors, and appraisers will be required by government to collect and remit 12% HST on their fees. Under the current system, only 5% GST is charged on professional services associated with real estate transactions. Under the proposed HST, the taxes charged on those services will jump an additional 7%, adding to nearly all closing costs.
The bottom line is that the HST will increase the cost of buying and selling all property and it will have an impact on the purchase of newly-built homes. Almost 60% of the average family's household income is required to cover home ownership costs. These costs will increase with the HST. Click here for a list of some of the products and services affected by HST.
Property Transfer Tax
This tax is payable by anyone who purchases property in British Columbia and is calculated on the property's purchase price. Your REALTOR® or legal professional will be able to provide more details on the amount of tax that will be payable on your home purchase.
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 reduce the fee or waive the fee entirely, especially if you have other accounts with them.
Before lending you any money, most financing companies will require a property appraisal at your expense.
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.
Be prepared for bulkier mortgage payments if your lender requires you to have your property tax installments added to your payments (PIT). This is usually a condition of high ratio mortgages where you are borrowing more than the usual 75 per cent of the purchase price.
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 can range anywhere from .5 to 2.5 per cent of the mortgage amount and is added to the mortgage principal.
Land survey fee
Many lenders require an up-to-date Survey Certificate for the property you intend to purchase. The survey confirms the property's boundaries and ensures there are no structures like fences in the wrong place. If the property is located in a subdivision in an urban area, some lenders will accept a survey that was done within the past 5 to 10 years. Survey costs vary. You may want to ask the vendor to provide one as a condition of your offer to purchase.
Before issuing a mortgage, some lenders may require a professional inspection of your home; you may want the home inspected anyway. As a condition in the offer, and for a few hundred dollars, you can find out - before the house is actually yours - whether there are any major repairs that will be required in the first few years you own the property. This inspection may help you decide to buy - or not buy - the home or give you some leverage to have the vendor pay the costs of the repairs or adjust the purchase price.
Mortgage life insurance
This is a form of term life insurance that pays off the balance of the mortgage if you or your co-borrower dies (similar policies cover disability). Many lenders offer you the option of buying the insurance and adding it on to your monthly payments. You may prefer to protect yourself by taking out your own policy instead. Talk to your insurance agent.
Fire and liability insurance
Most lenders require that you carry fire and extended coverage insurance that exceeds the outstanding balance on the value of the home. Discuss this with your insurance agent.
Even the most straightforward home purchase requires a legal professional to review the offer, search title, draw up mortgage documents and oversee the closing. You can expect to pay all the legal fees required to arrange the mortgage, as well as "disbursements" (the costs involved in conducting a title search, drawing up the title deed and preparing and registering the mortgage). Legal fees can vary widely so shop around before deciding on a legal professional.
These could include the cost of adjustments to property taxes, utility bills, heating oil and so on which the vendor has pre-paid beyond the closing date and wants to be reimbursed for. To avoid any surprises, ask your REALTOR® to explain each cost you are likely to incur.
Maintenance and utility costs
In addition to budgeting for your monthly mortgage and property tax payments, you will have to budget for the monthly cost of heating, electricity and other expenses related to your home.
If you have purchased a condominium, you will also have to pay your proportionate share of owning and maintaining the common areas. This is normally paid in the form of a monthly maintenance fee.
Most new buyers will either have to hire a professional mover or rent a truck and do the move themselves. Fees for movers and truck rentals can vary, and be even higher at the end of the month or in summer when demand for movers and trucks increases.
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