Consider all costs when buying a home – not just price

By Jesse Abrams
October 22, 2020

Since the beginning of March, the Bank of Canada’s overnight rate has been on a steady decline, hitting a record low of 0.25 per cent. This rate drop has led to a large decline in interest rates for mortgages, which has increased home affordability among Canadians and spiked considerable activity in the marketplace. With more buyers entering this hot market, it’s important not to lose sight of the financial responsibilities that come with making this investment. If you’re in the process of looking for a home, one of the best ways to be prepared is to understand all of the costs associated with making this purchase.

First, how do interest rates impact home affordability?

Interest rates impact housing affordability because they dictate how much you can actually borrow for a mortgage. With interest rates as low as they are, this has increased the purchasing power and overall housing affordability among buyers and homeowners in Canada. While this is an opportunistic time in the market, there are many other cost factors that need to be considered.

Mortgage prepayment penalties

Before you decide on a mortgage, be aware of the prepayment penalties associated with the various products. Every lender has different terms and conditions when it comes to prepayment penalties and privileges. These penalties come into play when a homeowner decides to either refinance their mortgage or make a larger payment that exceeds their privileges. Depending on the lender you choose, these penalties can amount to tens of thousands of dollars, making this a key cost consideration during your home search. If paying off your mortgage early is a goal, understanding these details is key and can lead to substantial cost savings.

At Homewise, our borrowers often choose mortgages with lower penalties, even if it means having a slightly higher rate. Working with more than 30 banks and lenders, we provide a wide selection of mortgage options and are transparent in making buyers aware of the penalties before locking anything in.

Closing costs

Often overlooked, closing costs are a collection of expenses applied on top of your home’s purchase price. These fees are important to consider at the start of your home search because they can impact your overall affordability. Closing costs typically account for 1.5 to four per cent of a home’s purchase price and vary depending on the city or province you’re buying in. Some of these costs may include home inspection, property taxes and insurance, land transfer tax, lawyer and appraisal fees, and more.

CMHC Insurance

If you’re buying a home with a down payment that’s less than 20 per cent, you’ll be required to pay mortgage default insurance. This is used to protect lenders in the event that a borrower is unable to make their mortgage payments. This insurance can be paid in a lump sum or added to your monthly mortgage payment, and will vary based on the size of your down payment.

For example, if you put five per cent down on a $425,000 condo ($21,250), you will be required to pay a four per cent premium, or $16,150. However, if you put 11 per cent down ($46,750), your premium lowers to 3.1 per cent, or $11,726. The larger your down payment, the less insurance you are required to pay. Another hidden cost to consider is the provincial sales tax associated with the insurance, which is due at the time of closing.

Homeownership costs

Once you move into your home, there are costs that will come with owners. This includes annual costs such as property taxes, but also maintenance costs, heating and electrical and home furnishings. Be prepared to keep savings available for the home once you move in.

If you’re in the market to buy a home, taking these additional costs into consideration will make the home shopping process easier and ensure you’re prepared to make this investment over the long term. Buying a home is a very exciting milestone, but it also involves great responsibility. It’s paramount that you take these additional costs into consideration. If you do have questions, working with an unbiased advisor to ensure you are making the right decisions. Getting pre-approved is a great starting point.

Jesse Abrams is Co-Founder at Homewise, a mortgage advisory and brokerage firm based in Toronto.


About Jesse Abrams

Jesse Abrams is Co-Founder at Homewise, a mortgage advisory and brokerage firm based in Toronto.

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