Buying real estate involves several costs of which many buyers are unaware. With today’s home prices, coming up with the minimum 5% or 20% down payment is no easy feat, so it may seem like this should be enough to cover the cost of buying a house. However, before ever making a mortgage payment, buyers will need cash upfront at various stages of the process to get the keys. Make sure to leave room in your budget for these five hidden costs.

Home Inspection

This is the first hidden cost buyers may encounter, and while it’s not mandatory, most real estate professionals recommend a home inspection. Even if the sellers have already completed one, it’s best to order your own for peace of mind. This typically costs around $500 and can uncover areas where the property may need expensive upgrades or repairs. This information could safeguard you from making a bad deal or help you to negotiate a lower purchase price.

A home inspector checks to see that a home’s structure and systems are sound. Are heating, cooling, plumbing, and electrical up to code and running smoothly? Are the roof and foundation structurally sound? Are there unwanted guests living in the attic? An inspector is trained to spot the tell-tale signs and may recommend further evaluation by a specialist. Your realtor can refer a trusted home inspector because licensing varies by province.

Appraisal Fee

Unless you’re buying a home with cash, your mortgage lender will require an appraisal to determine the property value. Often, this matches the purchase price, but the lender needs to do their own assessment because the property acts as collateral for the loan. (For tips on how to get the highest value for your appraisal, click here.)

An in-person visit by a licensed appraiser with a comprehensive, researched report may range from $300-$1,000+. Expect the higher amount if you need a rushed appraisal (common with a financing condition), if the home is considered “luxury”, has more square footage, or is in a rural area. Certain properties may be eligible for a digital appraisal, which is not as accurate but is much faster and cheaper at only around $100. Buyers with less than a 20% down payment are usually eligible for a digital appraisal because the property is default-insured.

Sometimes the lender may cover the cost of an appraisal. In this case, it is commonly worked into the interest rate or considered as “cash back” so buyers should ask questions to understand this hidden cost for their purchase.

Legal Fees

Your lawyer completes the final steps of a real estate transaction and gives you the keys, so this is one hidden cost that many buyers don’t think about until after they’ve signed a purchase agreement. Buyers should budget at least $2,000 for a lawyer to research property lines, prepare documents, transfer funds, and register ownership. It’s common for lawyers to advertise $999+HST or $1,200 for a purchase, but don’t assume a flat fee will be cheaper, because additional charges are common for anything from a title search to photocopying and mailing cheques. Depending on the nature of your transaction the lender may require your lawyer to perform other tasks, such as registering a bridge loan or providing independent legal advice, so it’s a good idea to have additional funds set aside for extra fees.

Closing Costs

Depending on what type of home you’re buying and where, closing costs can range from hundreds of dollars to hundreds of thousands. This is one hidden cost buyers can’t afford to miss because if there aren’t enough funds for the transaction to go through, buyers could lose their deposit and/or get sued. Buyers should have at least 1.5% in cash set aside for closing costs and request an estimate from their lawyer to avoid any surprises.

For example, 

Someone buying a $750,000 home:Would need:To pay for:
Pre-construction$97,50013% HST (if not included in purchase price)
In Ontario$11,475Up to 2.5% provincial Land Transfer Tax 
In Toronto$11,475Up to 2.5% municipal Land Transfer Tax
With less than 20% down payment$1,6748% PST on the mortgage default insurance premium
Who is new to Canada$112,50015% Non-Resident Tax

That’s potentially $234,624 in closing costs! Whereas the exact same purchase in Alberta might require less than $1,000, for registration fees. 

Sometimes closing costs can be borrowed on a credit card or line of credit, but this can also reduce the mortgage amount that you qualify for.

Click here for more information on closing costs and land transfer tax.

Insurance 

Buying a home is a big commitment, however many buyers neglect to account for several types of insurance as a hidden cost.

If you need a mortgage, property insurance is typically required by the lender to cover the replacement cost in case of fire. Home insurance can include personal possessions and is often bundled with car insurance, so may be more or less than $1,000/year depending on how much coverage you need.

Buyers with less than 20% down payment will also need mortgage loan insurance from either CMHC, Sagen, or Canada Guaranty. This can be 3-4% of the amount borrowed so it’s typically added to the mortgage for a small increase in monthly payments.

Spending a few hundred dollars on title insurance is highly recommended to protect against possible future legal claims. This type of insurance can potentially save you tens of thousands of dollars if the previous owners renovated without a permit or if you are the victim of mortgage fraud. 

Finally, buyers should budget for life insurance. Most families today need two incomes to qualify for a mortgage. If one borrower gets injured, becomes ill, or deceased, the financial obligation to make mortgage payments could be too great. Insurance costs are highly individual so ask your lender or insurance broker for a quote based on your needs.

Final thoughts

Even if you like surprises, it’s a good idea to avoid them when buying a new house. Today’s real estate transaction comes with additional expenses at various stages of the process, and buyers need to have enough cash up front to get the keys. These hidden costs may not all apply to your purchase so consult a professional to get the right advice for you.

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