In the “Homeschooling” report, we will provide Canadians with essential insights into the housing market that may not be covered in traditional school education. Today, we’ll delve into the world of closing costs when buying a home and shed light on important details that first-time homebuyers often overlook.

Buying a home is a significant milestone, where saving for a down payment and securing a mortgage are crucial aspects of the process. However, another crucial aspect that is often overlooked is closing costs, the expenses incurred when taking possession of the home. While these fees and taxes may seem minor individually, they can add up to thousands of dollars, making it important for first-time buyers to understand and plan for them.

Here are insights from real estate legal experts in Canada to explore the essential factors that first-time homebuyers should consider when embarking on the journey to purchase their dream home.

Dharam Dhillon, a B.C.-based real estate lawyer, emphasizes the importance of early preparation. Initiating the paperwork and budgeting process with a lawyer at least two weeks before completing the transaction can reduce stress related to numerous unfamiliar fees and paperwork.

One of the most significant costs during the closing process is the land transfer tax, which varies by location. In provinces like Ontario and B.C., these taxes are calculated as a percentage of the purchase price.

For example, in Ontario, for the first $55,000 of the purchase price, a 0.5% tax rate applies, and any amount above that up to $250,000 is taxed at 1%, and so on.

According to the Canadian Real Estate Association, using Ratehub.ca’s land transfer tax calculator, a first-time homebuyer in Ottawa may have to pay $9,850 to purchase a $668,000 home, the average home price in Canada the previous month. However, a buyer of a similarly priced home in Toronto would pay double that amount.

There’s good news for first-time homebuyers, though: tax rebates can help offset some of these costs. For example, first-time homebuyers in Ontario and Toronto can save thousands of dollars in land transfer taxes.

First-time homebuyers in Ontario can receive a $4,000 provincial land transfer tax rebate, while Toronto residents can save up to $4,475. Similar programs are available in other provinces.

In addition to land transfer taxes, other “fixed costs” also contribute to closing fees. These include real estate lawyer fees, title searches to determine ownership rights, and title insurance. Furthermore, property tax adjustments and goods and services tax (GST) may apply based on the nature of the transaction.

To avoid surprises, buyers need to plan ahead. Dhillon recommends budgeting an additional $2,500 to $5,000 for closing-related expenses.

Couples receiving financial assistance from family members for the down payment should consider legal safeguards. Additionally, legal experts suggest drafting wills to clarify asset distribution in case a spouse passes away.

Expert Malhotra emphasizes that changing locks is an important step after receiving the keys. This simple but often overlooked action can prevent unpleasant surprises and ensure peace of mind in your new home. For those planning to buy a home, remember that while the excitement of homeownership is real, understanding closing costs and taking proactive measures can help you avoid unpleasant surprises and make the transition to your new home smoother.

In a concerning analysis, an expert describes Canada as teetering on the brink of one of the “largest housing bubbles of all time.” The consequences of this bubble bursting may be more severe than initially predicted, potentially pushing the country into a deeper recession.

While the immediate burst of the bubble may not have occurred yet, Phillip Colmar, a Partner at Global Strategy House at MRB Partners, emphasizes that it is nearly unavoidable. He explains the underlying crisis and shares crucial insights in an exclusive interview with Todd van der Heyden on Tuesday.

KEY POINTS DISCUSSED

1. Housing Price vs. Income: Colmar points out the increasing disparity between housing prices and income, a significant sign of a housing bubble. Prolonged low-interest rates have attracted many homebuyers, leading to a situation where homebuyers carry significant debt (called over-leverage) as the foundation of the entire system. Rising debt levels or excessive leverage has become a common phenomenon in the real estate market. The speaker suggests that this situation could pose potential risks when much of the real estate market relies on high debt levels, leading to financial instability if the housing bubble bursts or if interest rates rise significantly.
2. Leverage Levels: Homeowners in Canada are using significantly more financial leverage compared to homeowners in the United States before the housing market collapsed in 2008. Colmar highlights Canada’s alarming position in this regard, calling it “off the charts.”
3. Mortgage Renewals and Burden: In contrast to the United States, borrowers in Canada have to renew their mortgages every five years at the prevailing interest rate. This arrangement has led to massive mortgage burdens and challenges regarding repayment. Colmar emphasizes that while the ability to repay is currently strained, servicing mortgage debt is also overextended.
4. Rising Interest Rates and Debt Management: Canada’s interest rates are currently at their highest since 2001, following a series of rate hikes aimed at curbing inflation. Colmar underscores that the pressures faced by homeowners carrying mortgage debt are just a glimpse of the challenges ahead.
5. Potential Triggering Factors for an Explosion: Colmar suggests that while the housing collapse may not happen immediately, rising mortgage rates and employment levels are critical factors to monitor. He warns that if mortgage rates surge simultaneously with an increase in unemployment, Canada could find itself in a situation similar to the 2008 U.S. crisis, leading to deep deleveraging, significant economic recession, and currency depreciation.

In conclusion, while the Canadian housing bubble may not have burst yet, the warning signs are unmistakable. The nation’s real estate market faces substantial risks and must closely monitor interest rate fluctuations and employment trends to avoid hidden economic instability.