CLOSING COSTS-BIG PART OF HOME BUYING

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

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, 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.”

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.

Sukkau recently experienced this “hidden cost” issue when listing the home of a young military couple in Niagara. 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 3 or 4 per cent of the purchase price. Expect to recommend that clients should earmark at least a few thousand dollars for these costs.

Here, thanks to CMHC, the Manitoba Real Estate Association and the Nova Scotia Association of Realtors, 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.