Sun
First-time homebuyers should give themselves a plush financial cushion to avoid being sideswiped by hidden costs like taxes, title searches and legal bills that can often add tens of thousands in charges before the final deal is done, experts say.
Myron Knodel, a chartered accountant and manager of tax and estate planning with Investors Group, says real-estate rookies are most often caught off guard by the land transfer tax which is assessed when a title is re-registered from one owner to another.
“There’s five provinces in Canada that assess that — B.C., Manitoba, Nova Scotia, Ontario and Quebec,” he said.
“And it’s [calculated] on a graduated basis, meaning that the rate will start sometimes as low as a half a per cent, graduate up to 1.5 per cent to the extent that the cost of the home is $200,000 or less. But then in most provinces, other than Ontario, as soon as you hit $200,000, it goes up to two per cent.”
In Ontario, the two per cent does not apply until the home’s value exceeds $400,000. But even under those more lenient rules, land transfer taxes can be quite hefty.
For example, Ontario’s levy for a $300,000 home still amounts to $2,975. There’s also an adjustment for property taxes depending on the time of the year the property is acquired, leaving buyers to assume their portion for the year.
“It’s just something that oftentimes isn’t factored in, and then arrangements have to be made to pay that at closing,” Knodel said.
Other unforeseen costs can arise after the home is purchased. Maintenance costs and insurance can creep up on homebuyers who have only budgeted for their monthly mortgage payments.
“If you’re buying an older home, even though you get the engineer’s certificates and such, that can be quite significant,” he said. “You look at your mortgage costs … I’d say 10 to 20 per cent should almost be kind of a contingency reserve. It’s not going to happen every month but then all of a sudden you’re going to run into a situation where your roof needs replacing.” In order to manage that emergency stash, buyers should be realistic about what they can afford — particularly at a time when housing prices are skyrocketing across the country. Despite the fact that new home construction is slipping, Statistics Canada says prices remain astronomical, especially in Alberta’s booming oilpatch economy. Earlier this month, the federal agency reported the new housing price index rose 1.2 per cent in April to 138.2, the biggest month-to-month jump in 17 years. Calgary and Edmonton ranked first and second in terms of price increases that month, but Regina, Montreal and Vancouver also saw significant mark-ups as rising demand, higher material and labour costs and escalating land values combined to push up prices. Financial planners generally recommend that no more than 40 per cent of a household’s income should go toward total debt service, including interest, property taxes, heat, payments and other bills. Kathleen Waters, a trained real estate lawyer and vice-president of TitlePLUS insurance, said consumers also need to ensure they get their money’s worth out of legal fees.
It is important to understand that legal costs can be quoted in different ways. In some cases, lawyers give an estimate of legal fees before disbursements, which are essentially the firm’s out-of-pockets costs. Others give a more an “all-inclusive” assessment. She said another key item to review with the lawyer is title insurance, which is a one-time premium paid at the time of purchase.
While prices vary, in Ontario it costs about $200 for a $500,000 home. Title insurance is an inexpensive way to guard against complications including disputes over a vendor’s right to sell, building code violations, outstanding liens and outright fraud, Waters noted.
Additionally, if the homebuyer obtains title insurance, a real estate lawyer can often reduce the number of searches and investigations, thus saving the buyer out-of-pocket costs on their overall legal bill.
“That’s where your real estate lawyer becomes an invaluable resource: he or she navigates you through the major legal implications of home purchase, and can help prevent a dream home from turning into a nightmare,” she said.
© The Vancouver Sun 2006
