The Cost of Buying a Home

Buying a home should be a happy occasion, but don’t lose track of the practical considerations. It is also the biggest business transaction most of us will ever make and over-extending yourself financially or not properly evaluating what you can afford can easily put you in a position of financial instability . . . or worse. Understanding the economic factors involved is as important as finding the right house for you.

The cost of buying a home can be divided into three parts: the down payment, the mortgage and the additional costs. Information on down payments and mortgages can be found in Understanding Mortgages. This section deals with the often-overlooked initial and ongoing expenses of becoming and remaining a homeowner.


Initial Costs

You will need a lawyer to advise you and act on your behalf throughout the process. The fees for legal services and disbursements can vary widely. Some lawyers offer a flat fee, which lets you know exactly how much you will need to spend in advance. You should shop around to get the right price and to make sure you find the right lawyer for you.

Any lawyer will strongly recommend that you retain a reputable professional building inspector before finalizing your offer to purchase. Make sure you request a written report that assures you that the house is structurally sound as well as outlining anything that may need repairs or maintenance beyond the normal requirements of maintaining a home.

You will almost certainly be required by the bank or trust company holding your mortgage to obtain proper insurance coverage prior to closing, the completion of the purchase. Because insurance vary widely and fluctuate, it advisable to shop around for the best rates well in advance of your closing date.

Once you’ve completed your negotiations and your offer to purchase has been accepted, there are closing and adjustment costs to be paid as part of completing the purchase. These include reimbursements you make for expenses already assumed by the vendor, such as property taxes or utility bills, which are pro-rated based on your date of occupancy.

Upon registration of the deed to your home, you will also be required to pay the Land Transfer Tax, a one time tax based on the percentage of the final purchase price of the house. In Ontario, the Land Transfer Tax is calculated as 0.5% on the first $55,000 plus 1.0% of the amount from $55,001 to $250,000 plus 1.5% of the amount from $250,001 to $400,000 plus 2.0% of the amount in excess of $400,000. There are reductions and exemptions available in certain cases, such as for first time home buyers, inter-spousal transfers, sales from parents to children. If you think you might be entitled to a reduction or exemption, you should consult your real estate lawyer or realtor.

If you’re buying a new home, the Federal Goods and Services Tax (GST) will also be applicable. With various GST rebates and exemptions, however, determining exactly how much GST to pay can be fairly complicated. Assuming the house is going to be your primary residence, you will be entitled to a 36% rebate of the GST paid to a maximum of $8,750. This rebate declines for homes between $350,000 and $450,000 with new homes purchased for more than $450,000 not qualifying for a GST rebate.

If you are buying a previously occupied home, GST does not apply unless the home has been deemed by the Federal Government as having been “substantially renovated”. If you think this might apply to the home you are considering for purchase, you should consult your realtor or your lawyer to help you determine whether GST will apply.

Once you have completed the purchase of your home, additional costs may apply, such as moving costs. You may need to purchase such items as new appliances, new furniture, carpets or window coverings. All of these things need to be factored into your evaluation of what you can afford. Likewise, it is always a good idea to set aside a contingency fund for any unforeseen costs that might arise.


Ongoing Costs

As a homeowner, you will be taking on monthly obligations in addition to your mortgage payment. As with the initial costs, it is essential for you to have a realistic understanding of these costs in order to fully evaluate what you can afford.

You will be responsible for the property taxes on your home. These are generally billed by your municipality bi-annually. You may be required under the terms of your mortgage to provide your bank or trust company with proof of payment. Some financial institutions will also allow or even encourage you to make a provision for the payment of your property taxes as a part of your monthly mortgage payment. In doing so, they assume the responsibility of remitting your property taxes to your municipality on your behalf.

Depending on which municipality you live in, your local school taxes may be integrated with your property taxes. You will want to confirm whether this is the case in your municipality and, if it isn’t, determine when the school taxes are due.

You will also be responsible for all utilities and services to the house, including electricity, gas, heating, water, telephone, cable television and internet service. It is very easy to underestimate these costs, especially for anyone who has previously had some or all of these expenses included in their rent.

It is in your long-term best interest to properly maintain your home in order to maintain and even enhance its value. Ongoing maintenance can include occasional repairs or renovations, electrical and plumbing work, painting, lawn and garden care or landscaping, and snow removal.

If you purchase a townhouse or condominium, some of these maintenance costs will likely be covered by a monthly condominium fee. This will include your share of any common elements that the residents are collectively responsible for. It is important to know the details of your obligations in advance as well as to clearly understand what obligations are and are not covered by your condominium fees.

Clearly, there are numerous initial and ongoing costs associated with buying and owning a home that go beyond your down payment and mortgage payment. It is only when you have a clear and comprehensive understanding of all the costs you will be assuming with your new home that you can properly determine how much you can afford to spend.