I feel like the catchphrase of a first-time home-buyer is “I had no idea that was A Thing,” so I’ve teamed up with BMO to break down some of the key things you need to know going into the whole buying-a-house process over the next few weeks.
We’ve already covered how to get pre-approved for a mortgage, so you’ve got the biggest thing covered from a sheer dollar-amount perspective (it’s hard to out-expense hundreds of thousands of dollars, after all).
Today, we’re going to talk about everything you’ll need to know – and pay for – to actually get yourself to that closing date, where someone hands you the keys to your new home.
That’s right: Today we’re covering the Dread Pirate Closing Costs.
As a first time buyer, the one thing that everyone said to me more often than not was “save more than you think you need.” It turns out, they were right.
It’s one thing to see a number for land transfer tax, or lawyer’s fees, or a percentage for CMHC insurance on a website, and quite another to translate that number into the amount that will actually come out of your bank account.
All that said, I’m getting ahead of myself. When I spoke with Jared Ksenica, Regional Vice President of Specialized Sales for the Greater Toronto Division at BMO, he mentioned that the first thing anyone should understand going into the process is what CMHC even is – and how it’ll impact the amount they need to save.
We dove deep into what you need to know about your down payment and your closing costs beyond (and very much including!) your down payment.
PS. Dear American friends – there’s gonna be a lot of talk of Canada-specific closing costs in this article. Just a heads up!
Q: So tell me – what is CMHC, exactly?
CMHC is the Canadian Mortgage and Housing Corporation. They’re a government agency that does a lot of things, from helping to keep our housing market stable, to supporting Canadians in need of housing and giving objective, research-based advice to people like policy makers.
For most of us reading this article, the most relevant thing they do is charge supplementary insurance on any down payment on a house that’s less than 20% of the total house price. That insurance is designed to protect the banks and financial systems if you default on your mortgage – so no, it doesn’t really do much for you directly, but it does help protect us from a total housing market meltdown.
Q: What’s the bare minimum I need for a down payment under CMHC?
Another CMHC-led policy is that you can’t buy a house if you can’t meet a certain threshold of down payment.
“The minimum would be 5% of the purchase price, plus applicable default insurance premiums to enable a buyer to put down less than 20% of the purchase price,” explains Jared.
So if you’ve been hearing all of the news about CMHC raising the minimums for down payments, don’t panic too hard unless you’re actually rich: While yes, CMHC raised the minimum down payment amount to 10%, that only applies to the part of the purchase price that’s over $500,000.
If you’re buying a house that’s $499,999, you still only need to put down 5%, but I’d add that maybe you should seriously consider whether you can afford a half million dollar home with only 5% down.
You might be able to, and that’s great! But think it through, OK? For me.
Q: If I can put more down, that’s good, right?
Yes yes yes, a million times yes, because the more you put down, the lower total percentage of your house price you’ll pay in CMHC fees to cover that supplementary insurance. The CMHC percentage is applied to the purchase value of your house, which isn’t changing anytime soon – so the lower you can get that percentage, the better.
I asked Jared for an update on the current CMHC premiums, because they went up this year (yayyyy) and here’s what he shared.
“CMHC and other default insurer premiums range based on the total downpayment being provided,” advises Jared.
According to CMHC’s website, if you put down between 5% and 10% of the purchase price, you’ll need to pay 4% of your home’s value in CMHC premiums.
If you make it into the 10% to 15% down payment range, that CMHC premium goes down to 3.1% (which is still a big amount on a hundreds-of-thousands-of-dollars purchase).
So if you’re only ponying up 5% of the total purchase price, you’ll lose a full 80% of that down payment to the 4% CMHC fee.
There are some cases where putting down 5% makes sense, but with this increased fee, it’s important to really think about what would happen if housing prices went down after you bought – and you only have 1% equity in your house.
Q: Do I have to pay my CMHC insurance up front?
If you’re sitting there like “Well, I certainly don’t have an extra 4% of the house value, otherwise I wouldn’t be considering putting 5% down, Desirae,” I get that. Luckily, you probably don’t have to pay that extra 4% upfront.
“CMHC premiums can be added to the principal amount of the mortgage and included as part of the regular mortgage payments,” Jared advises, as we all breathe a massive sigh of relief.
What you will have to pay upfront, however, is the provincial sales tax on your CMHC premiums if you live in Quebec, Ontario or Manitoba.
Also, acronym overload, so let’s use an example.
If you bought a place in one of those provinces for $400,000, and put down 10%, your down payment would be $40,000 – and you’d pay $12,400 for your CMHC premiums. That amount can get added to your mortgage, thank god, but you will need to pay the sales tax on that amount upfront.
Since the applicable Ontario sales tax is 8%, you’d need to come up with $12,400 x 0.08 = $992 when you close on the property.
Which is like, not nothing.
Q: What’s the difference between CMHC insurance and house insurance?
Just so we’re all clear, CMHC is referred to as insurance, but it’s a totally different thing than the home insurance that will protect you from stuff like natural disasters and break-ins – and you need both of them.
CMHC protects your lender in case the worst happens, and you default on your mortgage.
Home insurance protects you, and the value of your house if something damages it. While the exact coverage details will be in your policy (always read your insurance policies, pals) it usually covers stuff like fires, water damage, break-ins, etc.
Q: What other closing costs should I save for?
I asked Jared for some real talk: What are people usually surprised by when they close on their first house, beyond just their down payment and CMHC?
“There may be a cost or fee associated with setting up an account with a service company such as Hydro and Gas (for connections, etc.) and if the seller had prepaid for some expenses such as property taxes through installment payments, the purchaser may have to cover these costs through the lawyer on the day of closing as part of the ‘statement of adjustments’.”
And speaking of your lawyer, you’ll need to save up to pay them as well, which could run you anywhere from $800 to $1500, depending on how complicated the sale is – but your best bet for estimating lawyers’ fees is to ask your realtor for a lawyer they recommend, and how much said lawyer will charge ya.
On top of all of that, there’s also the somewhat-but-not-really-optional expenses, like painting over that hideous maroon colour in the living room, and moving all your stuff into the new place. Plus, Jared has one last nugget of wisdom to impart.
“It’s always best to ask the seller if there is extra paint available for touch-ups,” says Jared, which I’ll second – even if it’s just a spare can of paint so that you can bring it to the hardware store to match the colour.
Much easier than trying to eyeball it, and you’re talking to someone who’s had to paint entire walls a new colour because of the inadequacy of this method. Hi.
Once all is said and done with my new place, you guys know I’ll give you the full, gory details on how much our closing-and-moving costs really ran us. We’re still in the thick of it thanks to our ultra-long closing date, but don’t worry – it’s coming!
And next week, I’ll be chatting with Jared and the BMO team one more time, to get clear on how we should all be budgeting for our post-new-house life (and the line items to add to your budget when you’re planning!)