Author: Mike Holman

 

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 9 – Closing costs.

 

Insurance of various kinds

In arranging insurance for our house, my husband and I were presented with other forms of insurance for consideration. Insurance is akin to gambling with your future; it is something for which one pays, but hopes never to require. The insurance companies take a similar approach in evaluating your circumstances, as they lose profit when they have to pay out money. Deciding what was appropriate for our circumstances was really a calculated guess based on what we thought the future could bring against how much money we were willing to put towards potentially (and hopefully) unnecessary expenses.

Home Insurance

Mortgage lenders require that fire and liability insurance in the form of home insurance be in place before closing. The insurance company places a replacement value on the house and property, and is another form of guarantee for the bank or trust company that its investment in your home is protected.

When shopping around for home insurance, I found it odd that it is an industry that is not transparent about its products. The insurance companies that I contacted, all recognized names, provided quotes based on the parameters that were discussed, but the specifics of the policy and its exclusions (i.e. the fine print) were not available until a policy had been accepted. Costs seemed to vary greatly between companies, and it was tricky deciding which policy was superior based on incomplete information. Nonetheless, home insurance is not something that one can choose to go without and I accepted a reasonably priced policy from a reputable company.

There are many elements that are factored into the cost of home insurance. If you own a car, it is best to start with the company that holds your car insurance as there are incentive discounts for purchasing additional products with the same company. Also check if your employer or professional membership association has negotiated any group discounts.

When calculating your policy cost, an insurance company creates a risk profile of your home and property. Factors such as the age of the house, type of exterior (brick, siding, etc.), style of the roof and percentage of older knob and tube wiring are examined.

Based on the insurance company’s criteria, a replacement value of the house and property is calculated. The replacement value is the cost to the insurance company to rebuild your home if anything should happen to it. I was dismayed to learn that the replacement value of the house was considerably less than what was paid for it, but learned that the land has a significant separate value.

Other factors which determine the cost of property insurance include the size of the deductible selected and the comprehensiveness of the coverage. Choosing a higher deductible, or a higher amount that one is prepared to pay before filing a claim, lowers the cost of the insurance. In addition, having a monitored security system in place will also decrease the annual insurance cost by anywhere from 5 to 20 per cent depending on the type of system installed and the insurance company’s criteria.

A comprehensive policy is the most inclusive home insurance policy and covers both the building and its contents for all risks, except for those specifically excluded. There are other policies that insure against specified perils, but I did not look into them. Like everything else, insurance products vary and merit some homework.

Term Life Insurance versus Mortgage Insurance

It is optional whether you choose to take out insurance to cover the mortgage. Mortgage Insurance is paid directly to the bank for the mortgage, and as I understood it, does not necessarily cover any administrative fees that may crop up. Term Life Insurance was recommended to us as an alternative to Mortgage Insurance as it cheaper and paid directly to the beneficiary upon the death of the policy holder. Another benefit to term life insurance is that the screening takes place before the insurance is approved so there is very little chance that the insurance won’t be paid out because of pre-existing conditions which is the case for mortgage insurance. Here are some ideas on how to calculate the amount of life insurance you might need.

Term Life is taken out for a specific time period, and can be cancelled at any time. Unlike Whole/Universal Life Insurance, which is a permanent life insurance vehicle, there are no penalties to cancel a policy. Term Life Insurance is a temporary type of product. Policies are usually for 10 or 20 year periods. A Term 10 policy has cheaper annual premiums, but the premiums fees can increase substantially after 10 years quite simply because one is older and may have had health changes. Term 20 premiums are slightly more expensive than the Term 10, but the fees remain the same for a 20-year period. The choice with these products is entirely dependent on individual circumstances and financial means. Some of the Permanent Life policies are advantageous in financial planning, but exactly how that works is a bit of a muddle to me.

When you have dependents, life insurance makes a lot of sense in that you want to ensure some money for your family’s future. The question is whether two healthy individuals require life or any other additional insurance when there are no dependents. After all, that extra $20, $50 or $100 a month could be directed to an RRSP or other money-earning vehicle.

Disability and Critical Illness Insurance

Aside from life insurance, my husband and I were asked to consider insurance in case something happened which threatened our livelihoods. These are very personal decisions and definitely expensive considerations. The group health plans with many companies often include life and disability benefits. You may want to confirm with your Human Resources Department about the particulars of your company policy and decide if they are sufficient for your circumstances.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 8 – Success!

In addition to the fees paid to a real estate lawyer for his/her professional services (approximately $1100 and up), you will also have to factor in closing costs of between 1.5-4% in Ontario. These will include some or all of the following:

– Ontario Land Transfer Tax – this can be largest portion of the closing costs, and is charged on a sliding scale depending on the house purchase price (see below)

– Toronto Land Transfer Tax – charged on a sliding scale depending on the house purchase price (refer to previous post)

– Survey or Certificate of Location fee — $600-$2,000

– Legal Fees – $1,100 +

– Title Insurance – approximately $200 against defects of title to property

– Disbursements – fees undertaken by lawyer for registrations and searches. These may include City Tax Certificate, City Building Department Report, Water Certificate, Hydro Certificate, Gas Certificate, Land Registry Office Title Search, Registration Deed, Registration Mortgage, Law Society Transaction Levy, New Survey/Title Insurance

– Fire insurance – as part of home insurance

– Home inspection: uncovers small and major repairs that will be required; may assist in reducing asking price when major issues are found; check that an inspector carries liability insurance in case of errors ($350+)

– CMHC fees if you have a high-ratio mortgage (discussed in a previous post)

– Adjustments to reimburse seller for pre-paid property taxes, utilities, etc.

– Taxes – resale homes unless classified as “Extensively renovated” are GST exempt. Most fees and disbursements are subject to GST. GST is not payable on the Ontario Land Transfer Tax.

– New Home Warranty for newly constructed houses

Ontario Land Transfer Tax

As the name describes, the tax is applied on the transfer of land and is paid by a purchaser. The fee is charged on a sliding scale based on the purchase price, and for us, 2% amounted to a lot of money.

Purchase Price	Ontario Land Transfer Tax
$0-$55,000	0.5%
$55,001 – $250,000	1.0%
$250,001 – $400,000	1.5%
$400,001 or more	2.0%

Detailed information is available from http://www.rev.gov.on.ca/english/taxes/ltt/rates.html.

The Mortgage Negotiations

As I explained in a previous post, the important elements of a mortgage are the rate, term, amortization period and type of product (e.g. fixed versus variable rate). The appropriate mortgage should be determined based on one’s financial circumstances and comfort level. My caveat – study and clarify the differences between the mortgage products of different lenders offering comparable rates.

Embarking on the process of finding a favourable mortgage rate felt like steeling for battle. Friends emphasized the impact of a single percentage point over the full course of a mortgage. By nature quiet-spoken, I found it an intimidating prospect. Any initial fears that I had about negotiating with my less than assertive personality faded as the banks and brokers clamored to be updated about our status, and strove to match another institution’s rates a number of times. It was an exhilarating and time-consuming process spanning several weeks.

In talking to the banks or brokers, remember that a mortgage (and its interest) presents a lucrative money-making potential for them. It is therefore important to sell yourself as a business proposition by pointing out your desirability as a client. Emphasize your current and future earning potential, and point out any investments or RRSPs that you have which could be moved over. This is not the time to be modest. Trumpet your professional background and point out any family or business relationships with the bank, especially sizable investments or accounts of long-standing. Play off one bank against another by keeping them informed about the rates you receive. The banks do want your business, and from my experience were willing to match a lower rate from a competitor. This is especially important if there is a bank that you would prefer to deal with and are receiving a lower rate elsewhere. It never hurts to ask.

As well as “shopping the banks” on my own, I also called two mortgage brokers that came highly recommended by friends. To the surprise of my husband and I, the rates that the brokers were able to negotiate on our behalf came nowhere near to matching the rates that I was able to obtain on my own. The rates did not even match the PAM (pre-approved mortgage) rate that we had received months earlier. One of the reasons may be that while there is no fee charged to the borrower, the broker still has to earn a commission. Although that broker commission is paid by the lending company, the broker’s “cut” likely factors into the discount that is obtained from a lending institution.

Our experiences with the brokers were different from that of our friends who found that the brokers obtained better rates than they could on their own. It may be a matter of timing with the financial markets or differences in our financial circumstances. As long as there are no fees involved, it doesn’t hurt to give a mortgage broker a try. I would still do my own rate research though, just in case.

Keep in mind that you should not burn any bridges along the way in your dealings. Bank staff, especially in a large city like Toronto will change employers, and you do not want to jeopardize any future negotiations when it is time to renew a mortgage. Each mortgage renewal is like a “free-for-all”, as the bank holding your mortgage may not necessarily grant you the same good rate, or may not be able to match a rate from a competitor.

At the start of the process, my husband and I were undecided about whether to go with a fixed or variable rate mortgage. Our friends and some of the mortgage agents were of the opinion that mortgage rates were on the decline. This was based in part on the sub-prime mortgage fallout in the States, as well as an unusually buoyant Canadian dollar. The mortgage that we went with in the end is a 5-year open variable one, with the borrowing rate based on a set discount off the bank prime rate. Our financial position is stable and will improve over time, thus having an open mortgage allows us to periodically make lump sum payments directly on the principal. A variable rate mortgage is essentially a gamble on the expectation of stable or declining lending rates. We feel reassured about our mortgage decision as the prime rate has already decreased and with it our mortgage rate.

Bank lending rates are based on the rates set by the Bank of Canada. These rates are adjusted on a fixed timetable eight times annually. While financial institutions base their prime lending rates on Central Bank recommendations, they are not obliged to do so. Rate changes have historically not fluctuated by more than a quarter percentage point at a time. As our initial best variable rate was much lower than the lowest fixed rates we were quoted, we could weather a few interest rate increases before worrying about converting to a fixed-rate mortgage.

After deciding about where to take out our mortgage, there was paperwork to be completed and official bank underwriter approval to be obtained. The bank application required the following: the MLS listing, Purchase Agreement, salary information and assets information. It is standard procedure, at least according to three of the major banks that I dealt with, that a house purchase of over half a million dollars requires a bank appraisal. The house appraisal was undertaken at the cost of the bank as an assurance on their investment that the property is correctly valued. The appraisal also looked at comparable sales.

After the approval by our bank’s underwriting department, our dealings with the bank were concluded. The final paperwork was signed at our lawyer’s office, and it was our lawyer who sent us copies of the mortgage documentation.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 7 – A close call.

Having inured ourselves to the speed-of-light pace of home buying in downtown Toronto, we had expected to be looking for a long period of time. To our surprise, just a few months into the search, we chanced upon an updated house with original architectural details just outside the Annex. The house was a bit more expensive than we had originally budgeted for, but it was affordable for us and most importantly in our target neighbourhood.

Despite the higher price, we still had to compromise on space. Many of the less expensive options that required additional work went through bidding wars which substantially increased their prices; thus the difference between a slightly cheaper property which needed more work and one in better condition was in some cases very small. For being able to avoid the potential renovation headaches, the higher purchase price simply made sense.

We were fortunate to avoid a bidding war which we ascribe to competition from other larger houses for sale nearby. Unlike what we’ve seen on television, we did not have to wait on tenter hooks at a coffee shop for our agent to present our offer. It was the lack of competition that worked in our favour.

We feel fortunate that we could afford a slightly higher selling price. We were careful to make sure that our budget could accommodate unexpected emergencies. We also wanted to ensure that we would not have to resort to a Kraft Dinner diet and that we would still be able to enjoy the downtown amenities that we love. Only time will tell if we have been foolhardy. Because we intend to live there for the long haul, even if values fall, our location will help cushion any losses.

We wanted to bask in the euphoric haze of having finally found a home; however, we had to get the various “close” elements into motion. The main areas that had to be set up included the lawyer, the mortgage and insurance.

The Real Estate Lawyer

The role of a real estate lawyer is quite straight-forward and is mostly administrative. As we had confidence in our real estate agent’s recommendations, we chose to use a lawyer that she suggested. Our agent also helpfully provided the lawyer with copies of the MLS Listing and Purchase Agreement.

It was the lawyer’s responsibility to coordinate the transfer of money from our bank to the seller’s bank, to draw up the paperwork for ownership, advise the local tax and water departments of the change in ownership, and make adjustments on any property taxes or utility payments prepaid by the seller. It was also the lawyer with whom we signed the mortgage paperwork and through whom we received the keys.

Below are the detailed responsibilities of a real estate lawyer:

– reviews the agreement of purchase and sale

– searches for arrears with utilities or property taxes

– advises the municipal tax and water departments of the change in ownership

– arranges the transfer of the Deed

– prepares the Ontario Land Transfer Tax Affadavit and collects the fees

– calculates and collects the Municipal Land Transfer Tax (as of February 1, 2008)

– ensures that fire insurance has been arranged on the property

– calculates the amount owing to the seller on pre-paid property taxes or utilities using a Statement of Adjustments

– coordinates with the mortgage lender and the lawyer for the seller/buyer (whatever the case may be)

– hands over the keys

What does the lawyer not do? Because of time constraints, there are areas that some real estate lawyers do not examine as part of the close process including property surveys, liens, open building permits and work orders against the property. If this is important to you, you should check with any lawyer you retain about his/her practice around these areas.

To protect against any potential property encroachments or other obstructions to your having clear title to the property, title insurance is extremely important, particularly if your lawyer will not being conducting a full title search. Title insurance protects a homeowner against any future problems with title and is a small price to pay (around $200) in case of anything the lawyer may have missed out on.