Climbing the property ladder an expensive exercise

The rings of the property ladder are greased with money and if you’re on the ladder, that includes your money.

I was well aware of the steep price tag on properties in Ottawa as I prepared to find and purchase my first home.

What wasn’t clear to me was just how many fees and services—some well-deserved, others arguably less so—came as part of the home-buying and moving process.

It isn’t just sellers, realtors and lawyers who stand to gain from the purchase of a home, I discovered; buyers will pay insurance companies, utility providers, tradespeople and retailers, banks and in some cases all three levels of government before they’re through.

Those added—and for some, unexpected– costs run into the thousands, something buyers aren’t always prepared for, say some of the professionals who earn their living from property transactions.

With a resale home, “you know what you’re getting”

The plan, hatched by my wife and me late last year, was to get into the housing market while interest rates were low. We would build up equity in a modest starter home, then upsize when our family and incomes began to grow, just like our parents had done.

We knew there would be “closing costs” as part of our purchase, but we just didn’t know what exactly that meant.

A month into the property search, we discovered it meant enough to re-evaluate our plan.

Our first love in real estate was a town-house in Barrhaven, one of the more affordable areas within a half-hour commute of the downtown. It had been listed for sale by a young couple hoping to buy a larger home for their growing family, the same plan my wife and I hoped to follow.

The costs of buying this starter home began to come into focus. We’d be paying a real estate lawyer to guide us through process of making the purchase. We’d be paying a home inspector to make sure the house was worth buying. We’d be paying thousands to the province of Ontario for the Land Transfer Tax, though what we’d receive in return wasn’t exactly clear.

It wasn’t long before we were tempted by greener pastures just a few kilometres away from the town-house: a model home showed us the space and luxury a new-build could offer instead, if we could pony up a little more cash.

Newly-built homes, however, come with a list of fees and taxes all their own: sales tax, warranty charges, and a deed preparation fee are all costs that apply only to newly built homes.

Perhaps more importantly, buyers will need to spend thousands, or even tens of thousands, to upgrade their new-build to the standards of a show model or a typical resale home.

Buyers are often surprised at how high those costs can run, said Debbie Wilkes, a real estate agent for Royal LePage in Ottawa and Manotick.

Depending on the builder, buyers of new-build homes can also expect to shell out to pave the driveway, install eaves troughs, fence their yard, buy appliances, and if they choose, add other finishing touches—hardwood or ceramic flooring, better quality light fixtures, a finished basement—that may already be in place in resale homes.

Not only that, but builders often fail to complete the construction of the homes they sell by the time specified in the purchase agreement, leaving some buyers stuck paying rent for months longer than they expected to, said Wilkes.

With a resale, “you know what you’re getting,” she said.

Many costs apply whether buying a new-build or resale home. Real estate lawyers strongly urge buyers to purchase title insurance, a one-time fee that protects against unexpected or unknown problems with the plot of land itself.

Title insurance–priced around $450 on average–will help home owners who discover problems with the property itself after the purchase: for example, that the city has an easement on the property, and needs to start construction in the backyard, said Ross Talarico, a real estate lawyer at Ottawa’s Talarico & Schwisberg Law Offices.

Home buyers pay real estate lawyers to investigate a property, and ensure it is free of liens or unusual legal complications. However, some problems can only be uncovered by commissioning a professional survey of the property, which can “easily” cost a few thousand dollars, said Talarico. Title insurance is a less expensive way to guard against issues with the property, though it can’t warn home buyers of potential problems before they commit to the purchase.

With all of these fees looming, my wife and I decided to dig a little deeper and skip the bottom rung of the property ladder. We settled on a larger (and pricier) three bedroom, detached resale home in Barrhaven. The extra costs associated with buying and moving came close to $7,000, not including the price of swapping in and out a few pieces of furniture.

That decision has stretched us a little further, and left us more vulnerable if interest rates increase faster than our incomes. It also saved us from paying thousands of dollars to move again in a few years. It’s early days, but we haven’t regretted it yet.


The added and unexpected costs of buying a home

Utilities: Fees for updating and transferring utility accounts.

-Enbridge Gas: $25

-Hydro: $30

-City property tax: $41 (up to $42 in April).

-City water/sewer: $41 (up to $42 in April) (Yes, they charge you a fee for changing each account).

-Internet: $50-65 (optional)

-Cable: $50 (optional)

Land transfer tax

-The formula is complicated, but for houses between $250,000 and $400,000 it amounts to (price x 0.015). With a tax rebate for first-time buyers of up to $2,000, that comes to about $2,400 in tax on a $400,000 house.

Legal fees

-about $850 for labour, and for the law firm to cover other costs on your behalf, including:

-paying a mortgage processing fee charged by the lender ($25)

-registering your mortgage and property with the province ($120-150)

-conducting a title search to ensure the seller legally owns the property, and no liens against it exist ($195)

-title insurance: about $450 OR a survey, at $2,000 to $3,000 (optional).

Lender/bank fees

-appraisal fee, which tells the lender the value of property they are investing in: $100 to $300

-CMHC high-ratio mortgage insurance: if a buyer can’t provide a down payment of at least 20 per cent of the value of the property, they will be required to pay an insurance fee, either in a lump sum or built into the mortgage payments.

This essentially pays back the lender if the buyer defaults, and the cost varies with the size of the down payment and value of the property. For a down payment of just less than 20 per cent of a $400,000 property, amortized over the 25-year maximum, the cost can reach $5,800.

-mortgage insurance: lenders will also recommend that buyers purchase monthly mortgage life insurance. This insurance pays a lump sum to buyers if their co-signer on the mortgage (a spouse, for example) dies, or if they are injured and cannot work.

This product ensures buyers can stay in their home if tragedy strikes, though it also means they are essentially paying to protect the lender against a mortgage default.  This optional fee varies widely with the age of the buyer and size of the mortgage, and can cost between $15 and $300 per month.

-fee to have the bank arrange property tax payments for the owner: $25 per year (optional).

-cost of a certified cheque to complete the purchase: $7

Charges tied to newly built homes

-Tarion warranty: a mandatory contribution to a province-wide warranty plan that insures buyers against major faults in the construction of a new-build that are discovered in the first few years after the purchase. For a house between $350,000 and $400,000, it comes to about $800.

-HST: another complicated formula, which changes with the value of the house and includes a provincial rebate.  A sales tax of about 5.2% typically applies to new-builds in the $300,000 to $400,000 range.

-deed preparation (charged by the lawyer of the builder, paid through your lawyer): $125

+ additional costs of upgrading the house and property to the same standards as a comparable new build (optional).

Additional fees

-home insurance: this insures home owners against damage to the house or its contents. Buyers typically must show proof they have insured a home in order for a sale to go through, to protect both the seller and buyer in the event of a flood or other serious damage to the property during the transition in ownership.  Cost: about $1,000/year.

-home inspection: professional home inspectors look over every inch of a home, to ensure buyers don’t saddle themselves with a property that requires major repairs. Cost: from $300 to $600.

-professional movers: $70 to $150 per hour. Depending on size of the apartment or house being emptied and moved, the total cost will run between $400-$1,200 for most homes.

OR, do-it-yourself moving:  U-Haul truck , gas, mileage, pizza and beer for helpers: about $200.

-changing the locks to the home: $55 to $100. (optional)

-Canada Post mail forwarding service: $7 per month. (optional)