You might feel relieved when you receive the keys to your new property, believing you’ve covered all initial expenses. However, there are final fees to consider – known as closing costs. Here’s what you need to be aware of to avoid any unforeseen charges.
Understanding Closing Costs in Canada
Closing costs encompass various additional administrative and legal fees incurred at the conclusion of the home-buying journey. These costs are separate from your down payment and ongoing mortgage payments.
Typically, you can expect these fees to range from 1.5% to 4% of your home’s purchase price, which can represent a significant sum. To ease your anxiety, it’s beneficial to familiarize yourself with these closing costs and anticipate how much each one may entail.
Pre-Mortgage Expenses
Before your mortgage officially closes, you may encounter several initial costs, such as:
- Home Inspection Fee –Engaging a home inspector is wise as a condition of your Offer to Purchase. For around $500, this expert can identify potential issues with the property, ensuring you enter the transaction fully informed.
- Deposit –When placing an offer, a cash deposit is typically required to demonstrate your commitment to the seller. This deposit counts toward your down payment and acts as reassurance of your financial capability. There is no stipulated minimum amount for the deposit, unlike the down payment.
Mortgage-Related Costs
If your down payment is below 20% of the home’s value, purchasing mortgage default insurance from either the Canada Mortgage and Housing Corporation (CMHC), Genworth, or Canada Guaranty becomes necessary. This form of insurance does not protect you but safeguards the lender in case of missed payments. The cost associated with CMHC insurance varies with the home’s purchase price.
Although typically not categorized as a standard closing cost due to the absence of an immediate payment, the CMHC insurance premium is incorporated into your total mortgage amount and amortized over the loan term. We mention it here to keep you fully informed.
Typical Closing Costs
When planning your budget, it’s crucial to have a clear understanding of the final expenses you will need to cover. Below is a rundown of common closing costs:
Legal Fees
You will require a lawyer to facilitate the home purchase, and anticipate paying fees for services such as document preparation, making disbursements (like court filing fees or courier costs), and registering your mortgage with the land titles office. The legal professional will manage title search fees and survey costs, which will be billed back to you.
Land Transfer Tax
Buyers often overlook this cost, but the land transfer tax can be significant. It is calculated as a percentage of the home’s sale price and was introduced to raise revenue for municipalities. Each province has its version of this tax, with varying rates. Usually, the more expensive the home, the greater the land transfer tax. First-time buyers may sometimes qualify for exemptions.
Appraisal Fee
For conventional mortgages (where the down payment is 20% or more), lenders typically require an appraisal to confirm the property’s market value. Appraisal fees typically range from $350 to $550 for standard properties, though the lender usually selects the appraiser.
Title Insurance
Legally known as “title,” your ownership of a property is protected by title insurance, which safeguards you in case disputes over ownership arise post-purchase. This can include situations where the former owner has unresolved debts, unpaid property taxes, or an additional mortgage. Title insurance usually costs upwards of $300 and is a requirement enforced by lenders. Your attorney will collect the premium during the closing process.
Provincial Sales Tax on Mortgage Default Insurance
If you are required to purchase CMHC insurance, while the cost itself is amortized over your mortgage, the provincial sales tax on this premium must be paid upfront. The exact amount depends on the premium’s cost and your province.
Additional Closing Costs for Rural Properties
Homebuyers purchasing rural properties may be required by lenders to test the well water and septic systems, an expense typically covered by the buyer.
Other Expenses to Consider
While these expenses do not fall strictly under closing costs, they arise during the final stages of the home-buying process and are worth noting.
Real Estate Agent Commission
As a buyer, you won’t have to pay your real estate agent’s fees. However, if you’re selling a property to finance your new home, budget around 5% of the sale price for your agent’s commission. Agents may offer discounts if you buy and sell through them.
Estoppel Certificate
If you’re purchasing a condominium, an estoppel certificate may be required, costing up to $100.
Property Taxes
Though property taxes are typically an annual expense and not usually classified as closing costs, depending on your location and the timing of your home possession, you might need to pay pro-rated property taxes upon closing.
For example, if you close on your home in mid-June and the prior owner has paid the annual property taxes in full, you will need to reimburse them for the portion of taxes covering the months following your move-in date.
Prepaid Utility Bills
You might need to reimburse the previous owner for any pre-paid expenses, including utilities and property taxes.
Property Insurance
On the closing day, property insurance (or homeowners insurance) must be active. This insurance typically covers replacing your home and belongings against various risks such as fires or floods. Premiums are usually paid annually or monthly, with varying costs based on the home and location. Homes located in flood zones may require additional flood insurance.
Home Renovations
You might find certain repairs or upgrades necessary upon purchasing your home; however, it’s advisable to postpone major renovations for a year. This will give you time to settle in and identify what truly needs changing.
Interest Rates
While not classified as a fee, the interest rates associated with your mortgage greatly influence your monthly expenses. Make sure to discuss both variable and fixed-rate options with your mortgage broker, as your choice will affect your financial planning.