Buying a house? Beware of closing costs
Denis de Frias · March 25th, 2009
During these difficult economic times, buying a piece of the rock may be the last thing on your mind. This may, however, be a time to take advantage of the great opportunities of a “buyer’s market” and climb on the property ladder, especially for the first-time Bermuda home buyer. Property prices are becoming reasonable, vendors are willing to negotiate and the rates offered by Bermuda lenders are at the lowest levels in years.
Before you make an offer on that dream home, the first thing you should do is to see what you can afford and make sure you factor in all closing costs associated with the purchase. The best place to start is to make appointments with local lenders and seek a pre-approved level of financing. Once this threshold is determined, you should calculate the associated closing costs for the transaction with your loan officer.
The first cost to consider is Government Stamp Duty charged on the transfer deed. It is normal in Bermuda for these costs to be shared equally by the purchaser and the vendor but this is a point of negotiation with each transaction. Government Stamp Duty on a transfer deed is based upon an escalating percentage of value. For example, total stamp duty costs on a transfer deed for a $500,000 purchase is $14,000; for a $750,000 purchase, $24,000; and for a $1,000,000 purchase, $34,000.
Government, as outlined in its recent budget announcement, will eliminate stamp duty costs for qualifying first-time home buyers on sales/purchase transactions of $750,000 or less. You will see from the costs above that this amounts to a significant savings.
The next closing costs to consider are legal fees for the transfer deed. As with stamp duty on the transfer deed, it is normal for these costs to be shared equally by the purchaser and the vendor. These fees are based on the Bermuda Bar Association’s recommended scale of fees and are tied directly to the purchase price of the property. Examples of the estimated total legal costs charged for a transfer deed are $5,725 for a $500,000 purchase; $6,975 for a $750,000 purchase; and $8,225 for a $1,000,000 purchase.
There are also costs associated with your mortgage. Your attorney must prepare a mortgage deed and there are stamp duty and legal costs associated with this document. Unlike costs for the transfer deed, these costs are for the sole responsibility of the purchaser/borrower.
Government stamp duties on mortgages are charged at one-quarter of one percent on the amount being borrowed when the mortgage is $400,000 or less, and one-half of one percent if the mortgage is more than $400,000. Following this guide, stamp duty for a $500,000 mortgage would be $2,500; for a $750,000 mortgage, $2,750; and for a $1,000,000 mortgage, $5,000.
Legal costs for the mortgage are again based on the Bermuda Bar Association’s recommended scale of fees and are directly associated with the amount being borrowed. Examples of the estimated total legal costs charged for a mortgage are $3,150 for a $500,000 mortgage; $3,500 for a $750,000 mortgage; and $3,800 for a $1,000,000 mortgage.
You should also be aware that lenders in Bermuda generally charge an administration or negotiation fee of up to one percent on your mortgage. The actual amount will be confirmed for you by your loan officer. Therefore, if you borrow $1,000,000 from a lender, they will charge a one percent administration fee of $10,000. This amount will be deducted from your loan so you will actually receive only $990,000.
To get an idea of total closing costs, let’s look again at our three examples. Based on a transaction in which the purchaser is not a first-time home buyer that qualifies for stamp duty exemption on the transfer deed, the costs for the transfer deed are shared and the purchaser borrows the full amount of the purchase price, the estimated closing costs for a $500,000 purchase would be $20,512.50; for a $750,000 purchase, $29,237.50; and for a $1,000,000 purchase, $39,912.50.
There may be other closing costs associated with your purchase such as legal costs for the negotiation and preparation of the contract agreement for the purchase, government search and document registration charges, surveying costs, property valuation costs or licence fees if any of the purchasers are non-Bermudian. You should contact your attorney to discuss all of the costs associated with your particular transaction.
Denis de Frias is a partner in Mello Jones & Martin’s property, trusts and estates practice group. www.mjm.bm
printed with permission of the Bermuda Sun