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13 Nov

Initial Costs Associated with Buying a Home in British Columbia

General

Posted by: Jack Dawson

When saving for a home, it’s important to understand all the out-of-pocket costs involved in the purchasing process. Below, I’ve highlighted costs to expect, although not all of them are always applicable.

Down Payment

This is the well-known primary cost, but many people aren’t aware of the specifics involved. If the home is not owner-occupied, or the purchase value is $1,000,000 or more, a minimum 20% down payment will be required. If the home is owner-occupied, and the purchase value is less than $1,000,000, then it can be a high ratio mortgage. This means that a minimum down payment is now 5% of the first $500,000 and 10% of the remaining value up to $999,999. High ratio mortgages must be insured by one of three institutions: CMHC, Sagen, or Canada Guaranty. There will be premiums associated with insured mortgages, although these will be built into the remaining balance and won’t affect your down payment or upfront costs. e.g., if you put $25,000 toward the minimum 5% down payment on a $500,000 property, you’d have a mortgage balance that will begin at $494,000 instead of $475,000 to adjust for insurance premiums.

Property Transfer Tax

This is generally the highest upfront cost after the down payment, but the good news is that qualifying first-time homebuyers are exempt from this tax if their property has a $500,000 purchase value or less. A partial exemption also exists for first-time homebuyers on a sliding scale from $500,001-$525,000. If the property or the buyers don’t meet the qualifications for the First Time Home Buyers Program, the tax rates for property transfer are the following and are based on the fair market purchase price:

  • 1% on the first $200,000
  • 2% on the portion greater than $200,000 and up to $2,000,000
  • 3% on the portion greater than $2,000,000
  • if the property is residential, a further 2% on the portion greater than $3,000,000

i.e., If a qualifying first-time homebuyer purchased a qualifying property for $500,000, there wouldn’t be any transfer tax associated with the initial cost. If the buyer or the property did not qualify, the transfer tax on a $500,000 property would be $8,000

Legal Costs

A lawyer is needed to close the transaction and ensure all legal and financial conditions are met. This is a relatively small initial cost, generally $1000-$1500. If a client does not have a lawyer in mind, a mortgage broker or real estate agent can usually recommend a great one, considering they deal with them often in their work.

Property Appraisal

If a home purchase is insured, meaning the down payment was less than 20%, an appraisal is not required. However, when an appraisal is required, it’s a relatively low cost for the buyer, generally ranging from $300-$600.

Property Inspection

For the buyer’s benefit, a home inspection is a strongly recommended condition in a Contract of Purchase and Sale. This cost should be similar to an appraisal.

Insurance

This is also a relatively small initial cost, generally being less than $1000 per year, although as property complexity and coverage increases, so does the cost of insurance. The lender will want you to be insured before closing, although this can be broken up into monthly payments.

Property Tax Adjustment

In British Columbia, property taxes for the calendar year are due on July 1st. This means that if the buyer purchased a property with an adjustment date after July 1st in a given year, a pro-rated share of property taxes would have to be paid between that date and the adjustment date, which would be listed in the Contract of Purchase and Sale. Property taxes vary between cities and municipalities and generally run several thousand per year. This cost can be included in the mortgage payments.

Of course, additional costs could always arise depending on personal circumstances, such as moving expenses. If all of the costs listed here are considered beforehand, the home buyer should be well financially prepared for the process.