What are Closing Costs?

Closing costs are a list of charges that your lawyer presents to you on the closing date which unfortunately surprises many people. According to CMHC and Genworth, one should have, in addition to the down payment, at least 1.5% of the purchase price for closing costs (we say 2-2.5%, just to be on the safe side). The costs vary among provinces, and for that matter, among cities.

Below you will find a brief explanation of these costs. Please note that not all of them may apply to your specific situation, and there may be more that apply in your circumstance. Use this is a  guideline, and then talk with your lawyer who can provide a more realistic estimate for your situation, since he or she is the best resource for your closing costs.

Appraisal Fee: The appraisal provides the lenders with a professional opinion of the market value of the property. This cost is normally the borrower's responsibility and it ranges as low as $70 for a drive-by appraisal to as much as $350 for a full appraisal, and the average being $250, plus H.S.T. Occasionally, the costs could be slightly higher for larger, custom-built homes, or homes in remote parts.

Home Inspection Fee: A professional inspection of the home, top to bottom, is for the benefit of the buyer, therefore, that's who absorbs the cost. A typical home inspection can cost anywhere from $300-$400, but our opinion is that they are well worth the investment. New home buyers may not worry about it, but a definite must for buyers purchasing properties older than 5 years. When hiring a home inspector, make sure the inspector has liability insurance, just in case a mistake is made.

Fire Insurance: All mortgage lenders will require a certificate of fire insurance to be in place from the time you take possession of the home. The amount required is generally at least the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size and extras being insured, as well as the insurance company and the municipality. The cost can vary anywhere from $250-$600 for most properties.

Provincial Sales Tax of 8% (P.S.T.): If your mortgage is CMHC or Genworth insured (less than 20% down payment), there is P.S.T. of 8% in Ontario, payable at closing, on the CMHC or Genworth fee. While the insurance premium can be added to the mortgage amount, the P.S.T. must be paid at closing. For example, a mortgage that results in a $1,000 insurance fee, will have to pay $80 in PST upon closing.

Land Survey Fee Or Title Insurance Fee: A recent Survey of the property is usually required by the lender, and if one is not available, it normally costs anywhere from $600-$900 for a new survey. In lieu of the Survey, most lenders today will accept Title Insurance, at a much lower price of approximately $225.

Legal Costs and Disbursements: A lawyer or notary will charge a fee for their professional services involved in drafting the title deed, preparing the mortgage, and conducting the various searches. The disbursements, on the other hand, are out-of-pocket expenses incurred, such as registrations, searches, supplies, etc., plus H.S.T.

Land Transfer Tax: Most provinces charge a land transfer tax, payable by the purchaser, and the amount varies from province to province. This tax is based on the purchase price. In Ontario, first time home buyers who purchase a new home get a refund up to $2000.

New Home Warranty: In many provinces, new homes are covered by a new home warranty program. The cost to the purchaser for this warranty is approximately $600 and should the builder default or fail to build to an agreed-upon standard, the fund will finish or repair the deficiencies.

Closing Adjustments: An estimate should be made for closing adjustments for bills that the seller has prepaid such as property taxes, utility bills, and other charges. Any bills after the closing date are the purchaser's responsibility. Your lawyer/notary will let you know what they are exactly once the various searches have been completed.

HST: On the purchase of a newly constructed home, HST is payable, but make sure you know who pays this, you or the builder. Therefore, on the offer, the purchase price will say "Plus HST" or "HST Included", and who gets the HST new home rebate. A lot of builders have included this cost into the purchase price so that the buyer does not have to come up with that at closing. (As well, this tax is also charged on all professional fees).

Always be an informed client.

For more information contact your Toronto Mortgage Broker 

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What is Equifax and Transunion?

Equifax and Transunion are consumer credit reporting agencies.

The Equifax and Transunion credit report offers vital information about your credit history. The information in your credit report serves as a reference point for banks considering your creditworthiness.

Your credit report will contain information on whether or not you have missed, or have been late on your payments in the past and how late you were. It will also provide details such as your current and previous addresses, social security number, any credit card accounts and current balances you may have, as well as past credit card accounts  even if those accounts have been closed or canceled.

This report also lists any auto loans and mortgages along with balances and how diligent you are about making the payments.

All banks will use Equifax and or Transunion. So it is important to check both agencies at least once a year to thoroughly review your credit history, and to check for errors or signs of identity theft in your credit report. .

Be an informed client.

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What is a conditional offer?

When you buy a house, there is usually a clause based on the following:

1. A home inspection
2. Selling your house
3. And most often, arranging mortgage financing.

There is a 5 day clause where you will need to arrange the mortgage. However when there are bidding wars, at times, you are advised to go with a firm offer so that the vendor can accept your offer compared to others.

But that can be dangerous because:

• If you are putting down less than 20% as a down payment, it is the Insurance (through CMHC/Genworth or Canada Guaranty) that has the power to approve your deal or not.
• The bank may require an appraisal and if the house is in bad repair the bank will not finance it. At times, if the appraisal is less than what you bought for, you will need to put more money down as a down payment.
• If it was a “grow-op” the bank will not finance it

As strategy it may be best to reduce the days on financing from 5 days to 2 or one day.

So if someone tells you to go firm on an offer, they better have the entire money to lend you. Otherwise, you must and should always place a conditional offer on what you buy. 

Always be informed

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What is a private mortgage?

It is a mortgage that is held by a private individual where the client could not get approved through an A or B bank.

People will use a private mortgage for the following reasons:

1. If the mortgage is in arrears with the bank
2. If there is a grow op of marijuana
3. If there is a bankruptcy and the client has not or just been recently discharged
4. If the client needs money for construction
5. If the client does not show a lot of income
6. If the client has very bad credit

These mortgages are short-term for only 1 yr until the client gets their situation better. The interest rates are higher, but it is better than paying 19-25% on their credit cards.

The public sometimes is upset to pay a private individual higher interest rates, but they are upset to pay the bank the higher interest rates? Go figure.

The public needs to understand that the banks will take a snapshot photo of your current situation. Once looking at the photo, if they do not like it they will not be able to help you out.

Thankfully, these private individuals do exist to help you short-term and get you out of this situation and when there are improvements we can move you back to the bank.

That is why it is important to understand that the banks are running a business and the client cannot take it personally.

It is important to be informed and educated.

Video http://youtu.be/trEJaYtozLY

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Is it better to pay your property taxes with your mortgage payment?

That depends. Some Lenders require you to.  If they don’t require you to, then it depends on you. Do you have the discipline to save $200-300 a month until the tax bill comes? If not, then let the bank pay your property taxes. It will be more convenient for you, and likely less stressful.

However, that convenience will cost you more money in the long run. In the first year on the mortgage, the bank will collect a little bit more than the actual taxes. The bank wants to make sure that they have a cushion built in for the future, should you default on the property taxes.

If you default, any taxes owing to the government are always in first position and take precedence over any outstanding mortgage balance. You must always pay your taxes first or the bank will pay them on your behalf and chase you down to settle the tax bill that you now owe to the bank!

The moral of the history is: if you cannot afford to pay the mortgage payments plus the property tax bill, then you cannot afford the property, it’s that simple. Don’t mess with the tax man!

Be an informed client. Seek professional advise. 

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Tips on how to improve your credit score

Avoid late payments on your credit cards. If you can, don't wait until the end of the month to pay you credit card bills. If you buy something today, go the bank the next few days and pay it off in full or make the payment earlier and not wait until month end. Also make more than interest only payments.

Do not let people pull your credit too regularly because your score will go down. 
Only pull when necessary to buy a property.

Do not close your credit cards.
The older your accounts, the better your score is

Avoid having high balances on your credit cards. 
Try to stay below your credit card limits and not be over the limit. Your credit card balance should be no more than 80% of your credit limit. 

No credit is bad credit. 
Try to establish some credit to show that you can be responsible with your payments. Worst case, use cash as collateral to secure credit 

Avoid bankruptcies, credit proposals, judgments and collections.

Always be an informed client.

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Four tips to ensure you can deduct interest on your debt

 

Ms. Smith owned a principal residence and a rental property. She owned her residence free and clear without any debt secured by the property. She had taken out a mortgage to purchase the rental property and was able to deduct her interest on that mortgage since the property earned rental income. That is, she directly used the mortgage proceeds for the purpose of earning income, so the taxman allowed the deduction for her interest costs. She then swapped the properties so that her principal residence became a rental and her rental became her principal residence.

Ms. Smith still wanted to own her residence (the former rental) free and clear of debt, so she borrowed funds against the new rental property (her former home) and used the proceeds to pay off the debt on her new residence (the former rental). Follow me? CRA then denied Ms. Smith her interest deduction going forward. They went to court over the issue, and CRA won the battle in court.

The ideas I mentioned before that your intention or purpose for borrowing money is irrelevant when it comes to deducting interest. Further, the assets you pledge as security for the debt are also irrelevant. All that matters is direct use of the borrowed money. So, what could Ms. Smith have done differently to enable a deduction for her interest? More importantly, what can you do today to ensure that you’re entitled to deduct interest on your debt? Here are a few ideas:

1. Sale to a friend: 

Ms. Smith could have sold her principal residence to an accommodating party – say, a friend or relative – in exchange for a promissory note. She could have then borrowed money from the bank to repurchase that property from her friend or relative. Her friend or relative could have then used the cash to repay the promissory note owing to Ms. Smith. If Ms. Smith then used the property to earn rental income (as she did), then she would have been able to deduct the interest on the new debt.

2. Sale on the open market: 

Suppose you have non-deductible interest on some debt. If you have other cash or marketable securities available, consider taking that cash or selling those securities for cash, using the cash to pay down your non-deductible debt, and then borrowing to invest in new assets (perhaps replace those same securities you just sold) with a purpose of producing income. Presto, you should be able to deduct your interest costs now. Just be sure to count the tax cost associated with selling any marketable securities beforehand. If you don’t like the tax hit you’re going to face when selling those securities, consider the next idea instead.

3. Transfer to a corporation:

Suppose you have non-deductible interest on some debt and you have other assets, perhaps marketable securities available. Consider transferring those assets to a corporation (even if these assets have appreciated in value there should be no tax to pay if you make an election under Section 85 of the Income Tax Act when making the transfer; see a tax pro). In exchange, take back a promissory note for the cost amount (that is, the adjusted cost base) of the assets transferred (the promissory note cannot be for more than the cost of those assets, otherwise you could trigger some tax). Then, borrow funds from the bank to subscribe for more shares in your corporation. The corporation can use the new cash to pay off all or part of the note owing to you. You can then use the cash to pay down your non-deductible debt. You should now be able deduct the interest on the new debt since the proceeds are used to invest in shares of your company.

4. Take out paid-up capital: 

Once again, suppose you have non-deductible debt. Suppose you also own shares in a private corporation and you have “paid up capital” in those shares (generally, you’ll have paid-up capital in shares to the extent you have subscribed for those shares using cash). Your corporation can then make a tax-free return of all or some of that paid-up capital to you (see a tax pro for different ways to do this). You can then use that cash to pay down your non-deductible debt. Finally, you can then borrow funds to reinvest in more shares of the corporation, or to lend money to the corporation (even at zero interest; CRA’s Interpretation Bulletin IT-533 confirms that interest will generally be deductible in this case).

Always be an informed client.

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