Anecdotes and Advice from a First Time Home Buyer Part 9 – Closing Costs

by Mike Holman

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My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 8 – Success!

In addition to the fees paid to a real estate lawyer for his/her professional services (approximately $1100 and up), you will also have to factor in closing costs of between 1.5-4% in Ontario. These will include some or all of the following:

- Ontario Land Transfer Tax – this can be largest portion of the closing costs, and is charged on a sliding scale depending on the house purchase price (see below)

- Toronto Land Transfer Tax – charged on a sliding scale depending on the house purchase price (refer to previous post)

- Survey or Certificate of Location fee — $600-$2,000

- Legal Fees – $1,100 +

- Title Insurance – approximately $200 against defects of title to property

- Disbursements – fees undertaken by lawyer for registrations and searches. These may include City Tax Certificate, City Building Department Report, Water Certificate, Hydro Certificate, Gas Certificate, Land Registry Office Title Search, Registration Deed, Registration Mortgage, Law Society Transaction Levy, New Survey/Title Insurance

- Fire insurance – as part of home insurance

- Home inspection: uncovers small and major repairs that will be required; may assist in reducing asking price when major issues are found; check that an inspector carries liability insurance in case of errors ($350+)

- CMHC fees if you have a high-ratio mortgage (discussed in a previous post)

- Adjustments to reimburse seller for pre-paid property taxes, utilities, etc.

- Taxes – resale homes unless classified as “Extensively renovated” are GST exempt. Most fees and disbursements are subject to GST. GST is not payable on the Ontario Land Transfer Tax.

- New Home Warranty for newly constructed houses

Ontario Land Transfer Tax

As the name describes, the tax is applied on the transfer of land and is paid by a purchaser. The fee is charged on a sliding scale based on the purchase price, and for us, 2% amounted to a lot of money.

Purchase Price

Ontario Land Transfer Tax

$0-$55,000

0.5%

$55,001 – $250,000

1.0%

$250,001 – $400,000

1.5%

$400,001 or more

2.0%

Detailed information is available from http://www.rev.gov.on.ca/english/taxes/ltt/rates.html.

The Mortgage Negotiations

As I explained in a previous post, the important elements of a mortgage are the rate, term, amortization period and type of product (e.g. fixed versus variable rate). The appropriate mortgage should be determined based on one’s financial circumstances and comfort level. My caveat – study and clarify the differences between the mortgage products of different lenders offering comparable rates.

Embarking on the process of finding a favourable mortgage rate felt like steeling for battle. Friends emphasized the impact of a single percentage point over the full course of a mortgage. By nature quiet-spoken, I found it an intimidating prospect. Any initial fears that I had about negotiating with my less than assertive personality faded as the banks and brokers clamored to be updated about our status, and strove to match another institution’s rates a number of times. It was an exhilarating and time-consuming process spanning several weeks.

In talking to the banks or brokers, remember that a mortgage (and its interest) presents a lucrative money-making potential for them. It is therefore important to sell yourself as a business proposition by pointing out your desirability as a client. Emphasize your current and future earning potential, and point out any investments or RRSPs that you have which could be moved over. This is not the time to be modest. Trumpet your professional background and point out any family or business relationships with the bank, especially sizable investments or accounts of long-standing. Play off one bank against another by keeping them informed about the rates you receive. The banks do want your business, and from my experience were willing to match a lower rate from a competitor. This is especially important if there is a bank that you would prefer to deal with and are receiving a lower rate elsewhere. It never hurts to ask.

As well as “shopping the banks” on my own, I also called two mortgage brokers that came highly recommended by friends. To the surprise of my husband and I, the rates that the brokers were able to negotiate on our behalf came nowhere near to matching the rates that I was able to obtain on my own. The rates did not even match the PAM (pre-approved mortgage) rate that we had received months earlier. One of the reasons may be that while there is no fee charged to the borrower, the broker still has to earn a commission. Although that broker commission is paid by the lending company, the broker’s “cut” likely factors into the discount that is obtained from a lending institution.

Our experiences with the brokers were different from that of our friends who found that the brokers obtained better rates than they could on their own. It may be a matter of timing with the financial markets or differences in our financial circumstances. As long as there are no fees involved, it doesn’t hurt to give a mortgage broker a try. I would still do my own rate research though, just in case.

Keep in mind that you should not burn any bridges along the way in your dealings. Bank staff, especially in a large city like Toronto will change employers, and you do not want to jeopardize any future negotiations when it is time to renew a mortgage. Each mortgage renewal is like a “free-for-all”, as the bank holding your mortgage may not necessarily grant you the same good rate, or may not be able to match a rate from a competitor.

At the start of the process, my husband and I were undecided about whether to go with a fixed or variable rate mortgage. Our friends and some of the mortgage agents were of the opinion that mortgage rates were on the decline. This was based in part on the sub-prime mortgage fallout in the States, as well as an unusually buoyant Canadian dollar. The mortgage that we went with in the end is a 5-year open variable one, with the borrowing rate based on a set discount off the bank prime rate. Our financial position is stable and will improve over time, thus having an open mortgage allows us to periodically make lump sum payments directly on the principal. A variable rate mortgage is essentially a gamble on the expectation of stable or declining lending rates. We feel reassured about our mortgage decision as the prime rate has already decreased and with it our mortgage rate.

Bank lending rates are based on the rates set by the Bank of Canada. These rates are adjusted on a fixed timetable eight times annually. While financial institutions base their prime lending rates on Central Bank recommendations, they are not obliged to do so. Rate changes have historically not fluctuated by more than a quarter percentage point at a time. As our initial best variable rate was much lower than the lowest fixed rates we were quoted, we could weather a few interest rate increases before worrying about converting to a fixed-rate mortgage.

After deciding about where to take out our mortgage, there was paperwork to be completed and official bank underwriter approval to be obtained. The bank application required the following: the MLS listing, Purchase Agreement, salary information and assets information. It is standard procedure, at least according to three of the major banks that I dealt with, that a house purchase of over half a million dollars requires a bank appraisal. The house appraisal was undertaken at the cost of the bank as an assurance on their investment that the property is correctly valued. The appraisal also looked at comparable sales.

After the approval by our bank’s underwriting department, our dealings with the bank were concluded. The final paperwork was signed at our lawyer’s office, and it was our lawyer who sent us copies of the mortgage documentation.

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{ 8 comments… read them below or add one }

1 Canadian Capitalist

Thanks for the link! Have a great weekend!

2 Cory

Hi Four Pillars,
I just read your post on mortgage negotiation, and I came across the analysis about variable and fixed. What I learned from my own research is that in any 30 year period in recent history, you will pay less in a variable mortgage than fixed. And correct me if I’m wrong, but if after getting a variable mortgage, you decide to lock in a fixed, you certainly don’t get to lock in the rate you have been enjoying with the variable.
That’s my 2 cents worth.

3 My Dollar Plan

We just refinanced with a new product, a 5/5 ARM. It adjust every five years. It’ll beat the fixed rate for the first 10 years at least. After that we’ll see…

4 Spudman

I thought that if you use a mortgage broker and go rate shopping on your own that you will be hitting the same institutions for the same mortgage and thus you’ll take a big hit on your credit score, which will then affect the rates from further rate searching. Is this true.

5 Mr. Cheap

Spudman: I think people worry about the ratecredit rating hit more than they need to. I think typically the mortgage broker will do one hit (they’ll know the best place to get you approved at). If Rob from Canadian Mortgage Trends swings by he may be able to confirm / deny this.

If you’re looking for your own mortgage, its possible to talk turkey with them without having a hit on your credit rating (I think there’s a soft hit or something they can do that won’t affect your rating, but will let them be able to tell you if they think they could pre-approve you with a hard hit).

You don’t need more than 2 or 3 quotes to have a pretty good range of options (in my opinion).

Finally, unless your RIGHT at the threshold, dropping a few point shouldn’t be too big of a deal.

As usual, I’m mouthing off about things I don’t know a WHOLE lot about (beyond getting a good rate on the only mortgage I’ve ever had 1.5 years ago). If anyone knows that I’m wrong, please correct me :-).

6 Mortgage Broker

Hi Mr. Cheap,

You’re right that brokers generally pull the client’s credit bureau only once when shopping multiple lenders.

Here’s a piece on mortgages & credit reports with more info…

Cheers,

Rob, Canadian Mortgage Trends

7 Mr. Cheap

Thanks Rob!

8 Maureen

Everyone forgets the PST on the mortgage insurance (CMHC) at 8%!! This cannot be financed in the mortgage and must be paid on the day of closing.

Maureen Tabuchi

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