Closing Day Costs
Its closing day and new home buyers are excited and nervous to finally
go sign papers at their lawyer’s office. Yet often, they are confused when they are told how much money they need to bring to complete their home purchase as it is often thousands of dollars more than they expected. Why is that? What can you do, as a first time home buyer to be better prepared for closing day costs?
This article will focus on 3 of the biggest items that come up most frequently on closing day as unexpected closing day costs: Property tax adjustments, mortgage interest adjustments and PST on mortgage-default insurance. (We are not going to consider land transfer taxes because we will assume that it is expected everyone is already aware that they must pay them – even first time home buyers are only forgiven a certain amount).
Property Tax
Property Taxes can surprise you in one of two ways. ONE the seller may have already paid their property tax for the full year and therefore they are entitled to be credited for their unused portion. (They have prepaid their property taxes and you are giving them back their money instead of the municipality giving them back their money – I’m just the messenger). And TWO, if your mortgage lender is going to collect your property taxes on your behalf they usually collect a few months’ worth upfront. Your lawyer should explain all of this to you when you go in to sign papers.
Mortgage Interest Adjustment
The day that your mortgage closes is the day that interest begins to accrue. But there may be a gap between the day your mortgage closes and the day of your first payment. That is called an interest adjustment period. If your mortgage closes mid-month and your first payment begins at the beginning of the next month (if you are a monthly payment for example), or even the month after that (i.e. your mortgage closes September 15th but your first payment does not start until November 1st), the lender is entitled to all of the interest from September 15th until November 1st. So they will calculate that as an interest adjustment and you may not be aware that you will have to bring in extra funds to cover this surprise. Your lawyer should explain all of this to you when you go in to sign papers.
Provincial Sales Tax (PST)
If your down payment is less than 20% of the purchase price, you must purchase mortgage default insurance or MDI. (UNLESS you are using a second private top up mortgage – contact me for details). The MDI protects your non-private lender in case you default on your mortgage payments. MDI insurance is a one-time premium of 4% of the loan amount if your down payment is less than 10% of the purchase price. Here’s the kicker….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 and financed like the MDI can. In Ontario the PST is 8%. Another closing cost you may not have considered. Your lawyer should explain all of this to you when you go in to sign your papers.
Bottom Line
Closing day there should be no surprises but there often is. You should always plan to have more money than you need to. If you are purchasing a rural property and there is an oil tank, you may even have to consider the costs of reimbursing the seller for filling up the tank. Always be prepared for the unexpected and keep in mind the following Top 10 Closing Costs (in no particular order):
1) Land Transfer Tax
2) Legal Fees and Disbursements
3) Mortgage Interest Adjustment
4) Provincial Sales Tax on MDI (Mortgage Default Insurance)
5) Prepaid Property Tax (potentially)
6) Status Certificate Fee (if purchasing a Condo)
7) Prepaid Utility or Condo Fees
8) New Home Warranty Enrollment Fee
9) Land Survey Fee OR Certificate of Location Cost
10) Mortgage Default Insurance
If you have any questions, always remember to give us, the professionals a call. We are happy to answer your questions. 855-755-1904 info@bossmortgages.ca