GET PRE-APPROVED TODAY!
902-225-6588
Blog Layout
Don’t Let These Unexpected Closing Costs Catch You Off Guard
August 21, 2020
First-time homebuyers are often on a tight budget, where every dollar is carefully accounted for. Yet, many report confusion when told how much money to bring to their lawyer’s office to complete their home purchase. It’s often thousands more than they expected. Why is that? And how can you better prepare yourself?
Today we will focus on the three biggest items that come up quite frequently as unexpected costs: property tax adjustments; mortgage interest adjustments; and PST on mortgage-default insurance. We don’t count items like land transfer taxes because they are (mostly) expected.
Property Tax Surprises
There are two ways property taxes can surprise you on your closing date.
1) The seller may have already paid property taxes for the full year, and as such is entitled to a credit for their unused portion. We call these prepaid property taxes.
millennials struggle with homeownershipSuppose your annual taxes are $7,200 and your seller prepaid the full year. With a closing date of August 13, you need to give back 140 days worth of taxes. That’s just over $2,760.
2) The other way property taxes can surprise you is when your mortgage lender is going to take a fixed amount for property taxes from your bank account along with every mortgage payment.
This means they are going to accumulate the taxes for you, and remit from time to time to your municipality.
They always start things off by collecting a few months’ worth upfront. It varies by lender and also by where we are in the calendar year. Don’t be surprised if it is three to six months’ worth of taxes. You can see how this adds up if your property taxes are $7,200 per year.
The Mortgage Interest Adjustment Surprise
Every mortgage has an interest adjustment date, which is the date from which your mortgage lender first starts calculating the normal ongoing interest you will pay.
When you close your purchase mid-month, you might have to prepay a few days’ interest on your closing date—it is called an interest adjustment, and it’s to address the stub period between the closing date and the beginning of the first payment cycle. Your lawyer should explain all that when you go to sign the papers.
Broker Lender Market Share The details will depend on your specific lender and how they approach this interest adjustment date. Some mortgage lenders will set your first payment exactly one payment period after your purchase completion date. In that case, the stars are aligned perfectly, and you can skip to the next section of this article. No Interest Adjustment for you.
Other lenders might prefer to collect from you on the first day of the month. And in this case, unless your purchase date is also on the 1st, there will be a partial month’s worth of interest your lawyer will collect from you, to adjust things until everything aligns perfectly.
Here is an example where you borrow $869,400 with, say, a 5-year variable interest rate of 1.86%:
Your closing date is August 13, 2020
Your first scheduled payment is set for October 1, 2020.
Your Interest Adjustment Date is September 1.
Your lawyer will collect an interest adjustment from you for the period August 13th to September 1.
That would be an extra $(902) 225-6588 you may not have been expecting.
This adjustment comes into play, whether you choose monthly, weekly, biweekly or semi-monthly payments.
Neither way is wrong or right, they are just different, and result in a difference of how much money you need on your purchase closing date. As Rob McLister wrote here, “keep in mind, it is possible to avoid interest adjustments altogether. To do so, you need to schedule your first mortgage payment exactly one payment period (e.g., one month) after your closing date.”
The Provincial Sales Tax (PST) Surprise
If your down payment is less than 20% of the purchase price, you must purchase mortgage-default insurance (MDI) to protect your lender in case you fail to maintain your mortgage payments.
How much are we talking about for MDI insurance?
Well, if your down payment is less than 10% of the purchase price, this one-time MDI premium is 4% of the loan amount. But, you must pay Provincial Sales Tax (PST) on the insurance premium, and that must come from your own pocket and cannot be added to your mortgage.
housing costsAs for the MDI premium itself, pretty much everyone just adds this to their core mortgage balance, and repays it over the life of their mortgage.
Suppose you want to buy a $900,000 townhome in Vaughan, ON, with a $65,000 down payment. Note that if you are going to put less than a 20% down payment on your home, then you must have mortgage insurance. This means your initial mortgage loan request would be $835,000 (cost of home – down payment).
Now you must factor in your insurance premium (4% of your initial mortgage loan amount). This would add a hefty $33,400.
But that’s OK, that $33,400 will simply be added into your total mortgage loan amount. It will be paid over time and included in your regular mortgage payment. So now your total mortgage loan amount is $869,400 (mortgage loan + insurance premium).
Remember our first point?
You must pay PST on the MDI premium, and that must come from your own pocket and cannot be added to your mortgage.
If you live in Ontario, you will pay 8% PST on your insurance premium to your real estate lawyer, which in this case is an extra $2,672* you may not have planned for, and this you must pay out of pocket.
*8% PST of $33,400 (insurance premium) = $2,672
PST Rates Across Canada:
8% Ontario
7% British Columbia
0% – In Alberta, Yukon, Nunavut and the North West Territories, you do not have to pay PST.
You can also find your provincial sales tax rates here.
The Takeaway
You can see how these three items could add up to a sizeable sum. In our example, they total more than $6,000, but the actual costs will be different for each buyer. For these specific items, it will come down to:
Is your down payment less than 20%, and thus you have an insured mortgage?
Do you live in a province where you are subject to PST?
Will your lender collect property taxes from you, or will you pay them directly?
Did your seller prepay the property taxes on the property you are buying?
How does your seller establish the Interest Adjustment Date?
Beyond these three potential surprises, there are other items that could become surprise closing costs: Top Ten Things You Need to Budget For When Buying a Home.
You need to understand which of them might pertain to your circumstances, and don’t wait till the last minute to find out. Your real estate lawyer, mortgage broker and real estate agent are all excellent sources of information about your home purchase. Don’t be afraid to ask!
Mortgage experts say the Bank of Canada will reduce the benchmark qualifying rate—a.k.a., “stress test rate”—from 4.94% to 4.79% this week. National Bank of Canada cut its posted 5-year fixed rate by 15 bps on Monday, following similar cuts by BMO and CIBC over the weekend, while RBC and TD lowered their rates last week. In May, similar big-bank posted rate reductions caused the qualifying rate to fall from its then-current level of 5.04%, since the rate is based on a mode average of the big banks’ 5-year fixed posted rate. That marked their first time since January 2018, when OSFI’s stress test was introduced, that the benchmark qualifying rate fell below 5%. “It will make qualifying easier, or permit some people to borrow fractionally more,” Paul Taylor, President and CEO of Mortgage Professionals Canada, told the Globe & Mail. Just how much more? Well, not a whole lot in the scheme of today’s average home prices. Rob McLister, founder of RateSpy.com, calculated that a buyer earning $70,000 a year and purchasing with the minimum 5% down would be able to afford roughly $4,000 more home, or about 1.2%. “That’s not much to get excited about, but on a market-wide basis, small buying power improvements are inflationary for home prices, other things equal,” he wrote. At 4.79%, the benchmark qualifying rate will be just 15 bps above the all-time low of 4.64%, last seen in July 2017, McLister notes. Stress Test Still Well Above Market Rates Despite the reduction, the stress test rate is still roughly 290 basis points above the lowest nationally available insured rate today. “At present, [the current formula] results in a big increment above actual contracted interest rates,” noted MPC chief economist Will Dunning in a previous report. And that’s despite the current interest rates expectations, including Bank of Canada Governor Tiff Macklem’s suggestion there will be no interest rate hikes for the next two or even three years. “Interest rates are very low and they are going to be there for a long time,” Macklem said. A Better Formula Still on Hold mortgage stress testWhile these recent small reductions to the mortgage qualifying rate are assisting affordability to a small degree, industry leaders have called on the federal government to proceed with a plan to change how the stress test rate is calculated. In April, the Department of Finance said homebuyers purchasing with an insured mortgage would be stress-tested at a rate equal to the weekly median 5-year-fixed insured mortgage rate plus 2%. At the time, when the stress test rate was 5.19%, the change would have reduced it to 4.89%. But in March, at the height of the COVID-19 pandemic, the government announced it would suspend the proposed changes. A similar change for the uninsured mortgage stress test, which was being considered by the Office of the Superintendent of Financial Institutions (OSFI), was also put on hold. The pause on new regulatory changes was sensible “given the marketplace uncertainty in March,” Taylor said last month. “However, as we begin to open businesses again…now is the time for OSFI and Finance to consider implementation of the new test.” Source: canadianmortgagetrends
Working with a direct lender like a bank might feel more “conventional”, but the reality is that an independent third party can offer impartial advice. Plus, brokers have access to a much wider array of products. If you still aren’t convinced that you should use a mortgage broker’s services to make sound financial decisions, have a look at these 10 great reasons to use a mortgage broker. Then you’ll be convinced! 1. GET INDEPENDENT ADVICE ON YOUR FINANCIAL OPTIONS BENEFITS OF WORKING WITH A MORTGAGE BROKER As independent mortgage brokers and mortgage agents, we’re not tied to any one lender or range of products. Our goal is to help you successfully finance your home or property. We will start by getting to know you and your home ownership goals, then we will make a recommendation, drawing from available mortgage products that match your needs, and finally decide together on what’s right for you. 2. SAVE TIME WITH ONE-STOP SHOPPING It could take weeks for you to organize appointments with competing mortgage lenders — and we know you’d probably rather spend your time house-hunting! Our mortgage broker team works directly with dozens of lenders, and can quickly narrow down a list of those that suit you best. It makes comparison-shopping fast, easy, and convenient. 3. WE NEGOTIATE ON YOUR BEHALF Many people are uncertain or uncomfortable negotiating mortgages directly with their bank. Brokers negotiate mortgages each and every day on behalf of Canadian homebuyers. You can count on our market knowledge to secure competitive rates and terms that benefit you. 4. MORE CHOICE MEANS MORE COMPETITIVE RATES We have access to a network of major lenders in Canada, so your options are extensive. In addition to traditional lenders, we also know what’s being offered by credit unions, trust companies, and other sources. We can also help you take care of other requirements before your closing date, such as sourcing mortgage default insurance if your down payment is less than 20% of the purchase price. 5. ENSURE THAT YOU’RE GETTING THE BEST RATES AND TERMS Even if you’ve already been pre-approved for a mortgage by your bank or another financial institution, you’re not obliged to stop shopping! Let us investigate to see if there is an alternative to better suit your needs. 6. GET ACCESS TO SPECIAL DEALS AND ADD-ONS Many financial institutions would love to have you as a client, which is why they often offer incentives to attract creditworthy customers. These can include retail points programs, discounts on appliances, shopping clubs, and more. We do the math on which financing and mortgage insurance offers might be worth your attention so you get the perks you deserve. 7. THINGS MOVE QUICKLY Our job isn’t done until your closing date goes smoothly. We’ll help ensure your mortgage transaction takes place on time and to your satisfaction. Institutions would love to have you as a client, which is why they often offer incentives to attract creditworthy customers. These can include retail points programs, discounts on appliances, shopping clubs, and more. 8. GET EXPERT ADVICE When it comes to mortgages, rates, and the housing market, we’ll speak to you in plain language. We can explain the various mortgage terms and conditions so you can choose confidently. 9. NO COST TO YOU! There is absolutely no cost to you for our services on typical residential mortgage transactions. How can we afford to do that? Like many other professional services, such as insurance, mortgage brokers are generally paid a finder’s fee when we introduce trustworthy, dependable customers to a financial institution. These fees are quite standard and nearly industry-wide so that the focus remains on you, the customer. 10. ONGOING SUPPORT AND CONSULTATION Even once your mortgage is signed and paperwork is complete, we are here if you need any advice on closing details or even future referral needs. We are happy to be of assistance when you need it.
Useful Links
Join the community
Contact Us
Powered by Premiere Mortgage Centre
Designed by Stay Social Marketing