Buying in Alberta? Closing costs to know as a first-time homebuyer

Are you a first-time home buyer looking to set your roots in Alberta? While you might be laser focused on saving for your down payment, it’s also important to have some money saved up for your closing costs. 

What are closing costs?

When buying your home in Alberta–especially if this is your first home–closing costs can be a bit of a gamble. These expenses, usually due on or before the day you close, can vary depending on where you live and the type of home you're buying. But if you want to plan ahead, a good rule of thumb is to expect them to fall somewhere between 2% and 4% of the total price of your new home. That's why it's a good idea to budget for the higher end, just in case you end up with some unexpected closing costs.

Acknowledge that while many homebuyers plan for standard closing costs, there are often less-known expenses or variables that can affect the final amount. This section will uncover these aspects to provide a more comprehensive preparation approach.

Variable Nature of Closing Costs

• Fluctuating Rates: The real estate market is dynamic, and professional fees reflect this volatility. For instance, legal or inspection fees aren't static; they fluctuate based on demand, the intricacies of your property transaction, and seasonal factors. A complex deal requires more legal legwork, potentially increasing attorney fees. Similarly, a home inspection during peak real estate season might be pricier than in slower months.
• Property-Specific Fees: Your dream property features could incur additional costs. For example, condominiums might have special assessments or specific municipal inspections, while rural properties might necessitate well water testing or septic system inspections, incurring extra charges. Anticipating these nuances helps avoid surprises.

The Impact of Mortgage Choices

• Loan Origination Fees: These fees encompass the lender's administration costs, including processing your application, underwriting, and funding the loan. While they're typically a percentage of the loan amount, shopping around or negotiating could secure more favourable terms.
• Points or Discount Points: Buying points is a strategic move to lower your mortgage interest rate. While this means more upfront closing costs, it's a long-term saving strategy on the interest over your mortgage’s life. Understanding the break-even point on this transaction is crucial to determine if it's beneficial in your scenario.

Prepaid Items and Escrows

• Prepaid Daily Interest Charges: The closing date dictates the prepaid interest charges due. Closing later in the month means fewer days of interest accruing, reducing your upfront outlay. However, this doesn't decrease your overall loan cost but defers it to the regular mortgage payments.
• Homeowners Insurance and Property Taxes: Lenders often require the first year's homeowners insurance premium at closing. Additionally, you might need to contribute to an escrow account for property taxes and insurance, safeguarding the lender's collateral.

Title Management

• Title Search Fees: A title search, ensuring the property is free from liens or ownership disputes, is paramount. This due diligence is a paid service, contributing to the closing costs, but it's invaluable in avoiding legal complications down the road.
• Lender’s Title Insurance: Unlike the optional owner's title insurance, lenders mandate lender's title insurance. It safeguards the lender's interests, protecting their investment against title defects. Though it's for the lender's benefit, the buyer usually incurs this cost.

Unexpected Adjustments and Last-Minute Negotiations

• Pro-Rated Responsibilities: Final settlement charges often include pro-rated amounts, such as property taxes or homeowner association fees, shared between the buyer and seller. These costs depend on the exact closing date.

Extended Rate Lock Fees: Mortgage rate locks have expiration dates. If your closing gets delayed, maintaining the initially agreed-upon rate might entail an extended rate lock fee. It’s an additional cost but can provide interest rate security in an unpredictable market.

And, in Alberta, there are several you need to consider.

What closing costs do you have to consider if you’re buying a home in Alberta?

Legal fees

Legal fees are one of the most significant closing costs you'll encounter when buying a home in Alberta. A real estate lawyer will help you with the legal aspects of buying a home, including reviewing the purchase agreement, registering the property, and transferring ownership. Legal fees can range from $1,000 to $2,500, depending on the complexity of the transaction.

Title insurance

Title insurance is an insurance policy that protects you from any defects or problems with the title of your new property. It provides protection against things like liens, encumbrances, or other issues that could affect your ownership of the property. Title insurance is typically required by mortgage lenders, and the cost can range from $200 to $400.

Property inspection

A home inspection is a crucial step in the home-buying process. It can uncover any potential issues with the property, such as structural defects or major repairs that need to be made. The cost of a home inspection can range from $400 to $600, depending on the size of the home.

Property appraisal

A property appraisal is an assessment of the value of the property you're buying. It is typically required by your lender to ensure that the value of the property matches the amount of the mortgage. The cost of a property appraisal can range from $250 to $500, but if you secure your mortgage with Pine, we’ll reimburse your appraisal costs.

Land transfer tax

In Alberta, there is no land transfer tax, which is good news for homebuyers. However, there is a land title transfer fee, which is based on the value of the property. The fee is $50 for the first $5,000 of the property value, and then $1 for every $1,000 of the value after that. For example, if you're buying a property worth $300,000, the land title transfer fee would be $350.

Home insurance

Home insurance–not to be mistaken for mortgage insurance–is a requirement when you have a mortgage, and it provides coverage for any damage to your home like a fire or theft. Usually, to close on your mortgage you’ll need to provide your lawyer proof that you purchased it. 

The cost of home insurance can vary depending on the value of your home, but it typically ranges from $1,000 to $1,500 per year.

Goods and Services Tax (GST)

If you're buying a new home, you'll have to pay GST on the purchase price. The GST is 5% of the purchase price, and it is typically included in the purchase price. However, if you're buying a previously owned home, you won't have to pay GST.

The good news is though, you may be able to get a rebate of up to $6,300.

Other closing costs

In addition to these general costs, specific cities in Alberta may have additional closing costs. For example, if you're buying a home in Calgary, you'll need to budget for compliance certificate fees and a property tax adjustment. If you're purchasing a condo in Edmonton, you'll need to pay a condominium document review fee in addition to other closing costs. Lethbridge and Red Deer also have compliance certificate fees and property tax adjustments that you need to consider.

Tips for Reducing Closing Costs

Closing costs can add up quickly, but there are some things you can do to reduce them. Here are a few tips:

• Shop around for legal services: Don't be afraid to get quotes from multiple real estate lawyers. You might be able to find a lawyer who offers a lower fee.
• Negotiate with the seller: In some cases, the seller may be willing to cover some of the closing costs. It never hurts to ask!
• Get a home inspection: While a home inspection is an added expense, it can help you identify any potential problems with the property before you buy it. This can save you money in the long run.

Other things to consider when buying your first home in Alberta

Saving for a down payment

In Alberta, the minimum down payment you need to purchase a home is 5% of the purchase price. However, if you can, it’s best to put down a higher down payment if possible, as this will help you secure a lower interest rate and reduce your mortgage payments.

To save for a down payment, consider setting up a separate savings account and automating your savings. This way, you can make sure that you're consistently putting money towards your down payment. You can also look into government programs that can help you save, such as the Tax-Free First-Home Savings Account, or the Home Buyers' Plan, which allows you to withdraw up to $35,000 from your RRSP tax-free to use towards your down payment.

Financial considerations

One of the most important things to consider when buying a home and getting a mortgage in Alberta, is your financial situation. On top of the money you’ll have saved for the down payment and closing costs, it’s important to stay on top of your credit score and debt service ratios. Take the time to review your finances and create a budget to ensure that you can afford the monthly mortgage payments and associated expenses of home ownership. If you need help figuring out what you can and can’t afford, you can always calculate ahead of time. 

The Canadian mortgage stress test

When it comes to getting approved for a mortgage, not just in Alberta but across Canada, all lenders will put you through a stress test–however this isn’t an actual test you need to take. Instead, based on your income and debt service ratios, lenders will see if you can qualify for a mortgage at a rate that's higher than what you’ll actually be paying. This is to make sure they can still afford their payments if interest rates rise in the future.

So, what does this mean for you if you're looking to buy a home? It means that you'll need to prove to your lender that you can afford your mortgage payments at the higher stress test rate. This might impact how much you can borrow and what type of home you can afford. So, it's important to keep this in mind when budgeting for your new home.

Are you ready to buy a home in Alberta?

On top of your down payment, closing costs are an important part of the home-buying process, and it's essential to budget for them when you're buying a home in Alberta. By understanding what closing costs are, and how much they can add up to, you can ensure that you're financially prepared to take on this significant investment.

If you're a first-time homebuyer in Alberta, it can be helpful to work with a mortgage agent who can guide you through the process and help you understand all the costs involved in buying a home. With the right knowledge and support, you can make your home-buying experience a positive one and enjoy your new home for years to come. So, if you’re ready to take the plunge on your home buying journey, apply with Pine today and we’ll get you started.