Barrier to home ownership about to rise

Potential first-time homebuyers know they need to sock away enough money for a mortgage. But many are often unaware about just how pricey it can be to close a home transaction. And it's about to become even pricier.

Potential first-time homebuyers know they need to sock away enough money for a mortgage. But many are often unaware about just how pricey it can be to close a home transaction. And it’s about to become even pricier.

On May 1, the rates to purchase default insurance from the Canadian Housing and Mortgage Corporation will rise. This will increase the cost of a home for those purchasers putting down less than 20 per cent.

That got me thinking that it was perhaps a good time to write an article explaining default insurance and encapsulating all of the closing costs associated with the purchase of a home.

The closing costs associated with the purchase of a home are subject to a few fluid factors, so they can be hard to decipher on your own. The major closing costs, which I will flesh out more fully below, are default insurance, legal fees, land title fees, fuel fill up and property taxes.

An individual is required by federal law to purchase default insurance when contributing a down payment of less than 20 per cent of the cost of a home. Default insurance protects the bank in the event that you default on your mortgage and the sale of the house does not cover your loan. The rate you pay depends on your loan-to-value ratio.

As of May 1, if your loan is 90-95 per cent of the value of the home you pay 2.75 per cent of the size of the mortgage; if 85-89 per cent, you pay 2 per cent; if 80-84 per cent, you pay 1.75 per cent.

A $320,000 mortgage against a purchase price of $350,000 is a loan-to-value ratio of 91 per cent, meaning the borrower pays $8,800 for default insurance. The CMHC website provides a more detailed breakdown of this insurance.

If you are getting a mortgage the bank requires that you retain a lawyer to complete the transaction. Lawyer fees in relation to a purchase are usually in the ballpark of $1,500 to $2,000 plus disbursements. The disbursements are usually around $200 to $300 dollars.

You also usually purchase a full tank of fuel from the vendor on closing. The vendor fills up the tank and leaves you with fuel for the winter. Tanks are typically 1,136 litres, so you can expect the cost of a full tank to run around $1,350. If the house is heated with electricity you do not have to worry about this. If the home has propane tanks you will have to factor in the cost for the fill of the propane tanks.

There are also land titles fees associated with the transfer of the property. There are three parts to this fee: the transfer fee, the mortgage registration fee and something called the assurance fund fee.

The transfer fee and mortgage fee are associated with the registration of the transfer and the mortgage and are dependent on the price of your house and size of mortgage. A $350,000 purchase price and a $320,000 mortgage will cost, respectively, $110 in transfer fees and $110 in mortgage fees. These fees increase around $25 each for every $100,000 in purchase price or mortgage increase.

The assurance fund insures landholders against certain weaknesses in the land titles system. To my knowledge the fund has never materially accessed in 100 years of the Land Titles Act. I may run another article on how to reform this fee as it is essentially a tax to fund an insurance program that must have long ago been topped up to a point where the actuarial probabilities are covered. But I digress. It is basically a fee of $100 per $100,000 increase in value since last sale. If the last time the property was transferred it sold for $200,000 and you are buying for $400,000, then the fee associated is around $200.

Depending on the day you are purchasing, property tax can also factor into the closing costs. As a full year of property tax is paid on July 1 of a year, any purchase after that date will see the vendor reimbursed some of the property tax paid. For example, if property taxes were $1,500 and you bought the home on August 1, you would reimburse the vendor the property taxes from August until December, or approximately $625.

In the example of an August 1 purchase of a $350,000 home with a down payment of $30,000, property taxes of $1,500 and a mortgage of $320,000, a purchaser can expect to pay in the neighbourhood of $12,815 in closing costs, with lion’s share being the $8,800 in default insurance.

This means that in order to complete the purchase of your $350,000 home with a $320,000.00 mortgage you are going to need to come up with $42,815, and not just the $30,000 down payment. If you are using a realtor they will help you run through these numbers as well, but it is important to have an idea of the closing costs so you don’t come up short on closing day.

I would like to stress that the above is not a quote for provision of legal services but rather a rough indication of what you can expect to pay. Each property is different and may come with added expense. Your lawyer will advise at the time of consultation as to the closing costs of a particular residential home purchase.

Graham Lang is a Whitehorse lawyer and long-time Yukoner.