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They say purchasing a home is one of the more stressful experiences in life. To make things easier, it’s important to understand the steps involved in buying a home. One thing you’ll need to contend with is closing costs. In this article, we’ll take a closer look at the various expenses you will face in order to finalize your home purchase. But first, what exactly are closing costs?
What Are Closing Costs?
When you purchase a home, you’ll encounter a number of legal and administrative costs during the closing process. These are referred to as closing costs, and they are over and above the down payment and mortgage costs.
How Much Are Closing Costs?
Because closing costs can vary, you should always budget 1.5% – 4% of the home’s purchase price for closing costs, or $4,500 –$12,000 on a $300,000 home. You can use our closing cost calculator to get a better idea of what fees you may encounter when you decide to purchase a new home or property in Canada. You’ll need to enter your purchase price, down payment percentage, the location of your property and the type of property its classified as to gain more insight.
Common Closing Costs In Canada
Below is a list of closing costs that the home buyer is expected to cover. They may not all apply to your situation, but it’s best to be informed in order to avoid any surprises. Common closing costs in Canada can include:
When you purchase a home, the transaction must be administered by a lawyer. Lawyers charge a fee to prepare the necessary documents, make disbursements, and register the mortgage with the land titles office.
Land Transfer Tax
This is a big expense many home buyers overlook. Every province in Canada has something called a land transfer tax, which is a percentage of the purchase price of the home. This tax was first introduced in Canada in the 1970’s to provide an additional revenue stream for cash strapped municipalities. The percentage varies from province to province, but the more expensive the home, the higher this amount will be. First-time home buyers are sometimes exempt from paying land transfer tax.
Provincial Sales Tax On CMHC Premium
If you’re contributing less than 20% as a down payment, your mortgage will need to be insured by Canada Mortgage And Housing Corporation (CMHC), Genworth or Canada Guaranty. This protects the lender from losses if the borrower were to default on the mortgage. While the insurance premium is usually included in the mortgage financing, the borrower is required to pay the Provincial Sales Tax on the CMHC premium prior to closing. The amount will vary, depending on the CMHC premium and the province you live in.
Home Inspection Fee
If you had a home inspection done as a condition of your purchase, you as the buyer will be expected to cover that cost, which should fall somewhere between $300 – $500. While a home inspection is not mandatory, it’s always recommended.
With a conventional mortgage (minimum 20% down payment), the lender will usually request that an appraisal be completed, to confirm that the home you’re buying is indeed worth what you are paying for it. Appraisal fees can range anywhere from $350 – $550 for a standard property. Sometimes, you may be able to negotiate a waiver, or partial waiver of the appraisal fee from your bank, as you are giving them a substantial amount of business.
Title insurance offers protection if you end up in a property ownership dispute after buying your home. The cost for this insurance can be upward of $300 and is a requirement of your lender that you purchase it. The lawyer will collect the premium at closing.
While property taxes are an annual expense that are not necessarily considered a closing cost, there are times when you may be required to pay a portion of property taxes at the time of possession. This can also depend on the municipality in which you reside. Here’s an example of when this may apply: Let’s say you’re purchasing a property in the middle of the year (July 1) but the seller has already paid the property taxes to the municipality for the full year.
In this instance, the seller will need to be reimbursed for taxes paid for the portion of the year that they won’t own the home. This amount may be included in the closing costs as a credit to the seller.
Additional Closing Costs For Rural Properties
If you are purchasing a rural property, your lender may require that the well water be tested along with the home’s septic system, to ensure both are in good working condition, and that there is an ample potable water supply on the property. This cost is usually paid for by the home buyer.
Closing Costs That Are Specific To Some Buyers
While the closing costs listed above are always required by law, some closing costs are only incurred by a select number of buyers depending on the property they’re purchasing.
CMHC Mortgage Insurance
In Canada, any home purchases made with less than a 20% down payment, require mortgage default insurance by law. This insurance protects the lender in the event that the borrower stops making payments and defaults on their mortgage loan. At the start of the mortgage, CMHC insurance premiums must be paid in full so if you plan to take out a CMHC-insured mortgage to purchase your home, you’ll want to be prepared to pay these costs when you close.
You can use a mortgage default insurance calculator to help you better understand how much money your CMHC insurance might cost on your mortgage. Although this insurance costs the average Canadian approximately 2.8% – 4.0% of their mortgage, it makes homeownership possible for some who may not otherwise qualify for a mortgage.
Property Tax Adjustments
Property owners are required to pay property tax every year and depending on where you live, you can choose to pay monthly, quarterly, twice a year, or even in a lump sum for the whole year. If the seller of the home you plan to buy has already paid their property taxes for the year, you’ll be required to reimburse them a prorated amount from the day you close, to the day they’ve paid up to in advance. You’ll find this amount listed on your Statement of Adjustments and you’ll need to be ready to pay it in cash on closing day.
Non-Resident Speculation Tax (NSRT)
On April 21, 2017, the Province of Ontario introduced a 15% tax on the purchase or acquisition of an interest in residential property located in the Greater Golden Horseshoe Region (GGH) by individuals who are not citizens or permanent residents of Canada or by foreign corporations (foreign entities) and taxable trustees. The Non-Resident Speculation Tax (NRST) applies in addition to the general land transfer tax in Ontario.
Specifically, the NRST applies on the transfer of land which contains at least one (and not more than six) single-family residences. Examples of land containing one single-family residence include land containing a detached house, a semi‑detached house, a townhouse or a condominium unit.
The interest adjustment is the amount of interest accrued between your closing day and the day your first mortgage payment comes out. Buyers may encounter this extra charge when their first mortgage payment doesn’t come out until after the mortgage closing date, which means there is some time in between both events where interest begins to accrue.
If you purchased a home for $250,000 with a mortgage rate of 2.89%, that would equal $7,225 in total interest. You would then divide that by the number of days in a year (365) to get a rate of $19.80 per day. You can then multiply that daily rate by the number of days between both transactions, and you’ll get the total amount of interest adjustments you owe. While it likely won’t be a large number, it’ll still add more dollars to your closing costs so it’s important to know in advance if these adjustments apply to you.
GST/HST On New Construction Housing
Building a new home means you won’t have to worry about land transfer taxes, but instead you’ll need to consider that new home purchases are subject to GST (or HST depending on which province you live in). If the builder has included the GST/HST in the purchase price, you can finance it with the mortgage, but if they didn’t include it, it becomes part of your closing costs. Paying for this amount as part of your closing costs can lead to serious sticker shock as the dollars can add up quickly, so be sure to ask in advance how the tax is being applied so you can be prepared when you close on the home.
Ways To Reduce Closing Costs
While you always need to budget for closing costs, here are a few ways they can be reduced:
– Phone around and compare legal fee rates before choosing a lawyer
– To offset the cost, find a lender who is offering rebates on new mortgages
– The lower your home purchase price, the lower your land transfer taxes
Who Pays For Closing Costs In Canada?
Most closing costs, like the common ones listed and outlined above, are covered by the buyer. Typically, the lender will cover the appraisal fee ($250 – $350) to determine the estimated value of your home.
While not all of the costs covered in this article may apply to your specific purchase, it’s safe to assume you’ll be responsible for legal fees, your down payment and a home inspection, at the very least. There’s no way to know exactly which closing costs you’ll encounter in advance, so for this reason, it’s always best to err on the side of caution when estimating what your total closing costs will be. At the very minimum, expect to pay 1.5% of the purchase price in addition to the down payment. If you’re also selling a home, aim for 4% – 5%.
How Do I Pay For Closing Costs?
Closing costs, along with your down payment, are paid to your lawyer when you meet to sign the mortgage registration documents. This is usually done about a week or so prior to the purchase closing date. Your lawyer will advise you in advance of the total payment required, and they will disburse the various amounts to the proper recipients.
Withdrawing RRSP Funds For Your Home Purchase
In Canada, first-time home buyers can borrow money from their Registered Retirement Savings Plan (RRSP) to go toward their down payment and closing costs. I use the word borrow, because under the Home Buyers Plan (HBP) the funds withdrawn must be repaid into the RRSP within a 15-year period, to avoid penalties.
If you’re taking advantage of the HBP, make sure that you leave plenty of time prior to closing to withdraw the funds. Depending on how your RRSP is invested, there may be a delay in receiving the funds. My advice is to check with your bank or investment advisor early on, to find out when you should withdraw.
A Final Word On Closing Costs
As you can see, there is plenty to consider when it comes to closing costs. With so many different expenses and fees, it can be very difficult to keep track. Keep things simple and focus on saving at least 2% – 3% of the purchase price to cover your closing costs. That way, you know you’ll have enough money to finalize your house purchase. From there, you can look for ways to shave off some of the cost using the tips included above.