Closing Costs: What They Are And How Much You'll Pay
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Closing costs refer to a large variety of different fees and charges associated with the completion of your mortgage deal, including all legal and administrative expenses you’ll be responsible for paying leading up to, or on, your home’s closing date. It’s important to include these costs in your budget because, in most cases, they can’t be rolled into your mortgage payments.
Important: Include closing costs in your budget because, in most cases, they can’t be rolled into your mortgage payments
- Closing costs are typically 3-5% of the home’s price, but it’s always wise to err on the side of caution by saving more money than you need
- Land transfer tax is one of the largest closing cost fees. The amount you pay is based on the purchase price of your home and typically only applies to resale properties
- You may not have to pay all of the closing costs listed in the article, especially if you’re a first-time homebuyer as rebates are available
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How Much Are Closing Costs?
Closing costs range depending on the specific property you plan to purchase but, as a safe estimate, set aside 5% of the purchase price as a buffer to cover these expenses. They typically amount to anywhere from 3-5% of the home’s price, but it’s always wise to err on the side of caution by saving more money than you need. Any surplus can be used to help furnish and decorate your new home, or put aside for future maintenance costs. There really is no such thing as saving too much.
Tip: If you save more in your budget for closing costs than you need, any surplus can be used to help furnish and decorate your new home.
Types Of Closing Costs
Here are some of the most popular closing fees you can expect to pay.
Land Transfer Tax (provincial and municipal, where applicable)
This is one of the largest fees associated with the closing of your home. Representing a one-time payment, the land transfer tax is paid by the purchaser when the property is transferred from the seller. The amount you pay is based on the purchase price of your home and typically only applies to resale properties. If you live in Toronto, for instance, you’ll have to pay both the Toronto and Ontario land transfer taxes. But, if you’re a first-time homebuyer, you may be eligible for a land transfer tax rebate. We’ll provide full details on how to apply for any rebates. (See: First-Time Home Buyer Land Transfer Tax Rebates Across Canada)
Tax is only charged on new homes. But, you may be eligible for a rebate – both federal and provincial – in some circumstances. Certain conditions may apply, so be sure to consult your lawyer or notary for more detailed information.
An appraisal is an unbiased estimate on the value of your home requested by the lender. It certifies the property’s resale value to the lender in case you default on your mortgage. The cost is typically $300-$500.
Legal Fees & Disbursements
Your lawyer/notary will charge you a fee for drawing up the mortgage and conveyance of title. The amount of the fee will depend on the professional you use. The typical cost is $800-$1,000.
If you’re purchasing a single-family home, you’ll need to provide your lender with a survey certificate showing where the property sits within the property lines. Some exceptions are made, however, on low loan-to-value deals and acreage properties. A survey will cost approximately $750-$1,000, but the lender will often accept a copy of an existing survey.
You’ll need to pay interest on any gap between the closing date of the purchase and the first payment date of the mortgage. You can avoid an interest adjustment by scheduling your first mortgage payment exactly one payment period after your closing date.
Statement of Adjustments
Your lawyer/notary will calculate and prepare a statement of adjustments for your portion owing on utilities, property taxes and other bills based on where your closing date falls within the month/payment cycle. As some owners prepay these services, the adjustment could be quite costly.
Most lenders require title insurance to protect against losses in the event of a property ownership dispute. This is purchased through your lawyer/notary and costs approximately $200-300.
A home inspection is a wise investment, as a professional will offer an objective visual examination of the physical structure and systems within a house. Cost range is $350-500.
Tip: You can avoid an interest adjustment by scheduling your first mortgage payment exactly one payment period after your closing date
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Ways To Avoid Or Reduce Closing Costs
You may not have to pay all of the closing costs listed above, especially if you’re a first-time homebuyer. Your lender will give you a complete rundown of all costs as soon as your mortgage is approved and suggest any available rebates to help you save as much money as possible.
For example, HST/GST is only charged on new builds so, if you’re purchasing a resale home, you won’t have to worry about this expense.
In certain circumstances, depending on the specific property, you may not have to pay for a survey if the lender accepts an existing one.You can avoid paying an interest adjustment by scheduling your first mortgage payment exactly one payment period after your home’s closing date.
Do Closing Costs Vary By Province?
Many types of closing of costs will vary from province to province, as they involve provincial and municipal taxes.
- Land transfer tax is the type of closing cost that will vary the most across provinces. Depending on where you buy your home, you might also have to consider municipal land transfer taxes. That being said, some provinces offer rebate programs from this type of closing cost. You can use a land transfer tax calculator to determine how much you will pay in your province based on the purchase price of your home.
- HST/GST is an obvious second. While this type of closing cost only applies to newly built homes, the tax rate will vary depending on the province in which you buy your property.
Most other types of closings costs will depend on what your lender and your lawyer or notary charge you.
Do Closing Costs Vary By Property Type?
Closing costs do not vary by property type, but by the purchase price of the property. However, certain types of properties cost more than other and therefore, will have higher closing costs.
How To Estimate Closing Costs In Canada?
The safest way to estimate closing costs in Canada is to set aside approximated 5% of your home’s purchase price to cover all the types of closing costs. This is the higher end of what homebuyers typically pay in closing costs, so if you are a first-time homebuyer, it might be worth to research what exemptions may apply to you.
As land transfer tax makes up the largest portion of closing costs, using a land transfer tax calculator will provide you with an accurate baseline of how much you will need based on the province and municipality where you are buying your home.
As for the rest of the types of potential closing costs, consulting your lender and lawyer or notary will get you the most accurate breakdown of all the fees included in your closing costs.
Mortgage Insurance Fees
For many people, saving for a down payment is difficult. While it’s recommended that you put down as much as possible to reduce your mortgage amount, the minimum requirement in Canada is 5% for the first $500,000 and 10% for any portion above that threshold. If your down payment is less than 20%, you’ll be required to obtain mortgage default insurance, which protects your mortgage lender should you be unable to make your payments.
Mortgage insurance is payable upon closing, or it can be rolled into your monthly mortgage payments. This latter option makes it subject to interest, so we’ll make sure you understand what each option involves.
The following table shows you the mortgage insurance fees from CMHC as of January 12th, 2021.
|Loan-to-Value||Premium on Total Loan|
|Up to and including 85%||2.80%|
|Up to and including 90%||3.10%|
|Up to and including 95%||4.00%|
Who pays for home closing costs?
The buyer is typically on the hook for paying closing costs when purchasing a home.
The main closing cost paid by sellers is real estate commissions, which are typically split between the buyer’s and seller’s agent.
What if I can’t afford the closing costs when buying a home?
If you’re not able to afford the closing costs when buying a home, there are grants available. Be sure to chat with your mortgage professional to see what you can qualify for.
Can I use my credit card to cover closing costs?
Typically it’s not advised that you use your credit card to cover closing costs when buying a home.
As you can see, there are many closing costs involved in the purchase of a home. The best way to be prepared is to stay informed. We hope that this article was helpful and a reference point to you on your home buying journey.
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