So, you have purchased your dream house, the mortgage accepted, and you have made the first down payment. It is just a peek of the real deal. Closing costs are just a step away.
Closing Costs Overview for Canadian Mortgages
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Envisioning your dream house and actual purchase are two different things. To ease things up, you should be aware of the expenses of purchasing a home to factor in closing costs.
What are closing costs when buying a house?
Closing costs are the administrative and legal fees you pay once the purchase contract for your new home has been finalized. You only pay them once, but there are many costs to be aware of, which can rapidly accumulate.
To reduce being stressed with such costs, incorporate them into your budget. While some closing charges are voluntary, many are mandatory.
Let’s take a deep look into what is included in closing costs when buying a home in Canada.
What is included in closing costs in Canada?
Here, we have discussed 13 of what is included in closing costs in Canada. They may or may not apply to your case, but it is better for you, as a home buyer, to be prepared than to be caught off guard.
Deposit or Down Payment
You should not mistake a deposit with a down payment.
A down payment is a lumpsum reserved for buying a home.
In Canada, the standard down payment is 5% of the purchase price for homes priced at less than $500,000; for homes priced between $500,000 to $999,999 the down payment is 5% for the first $500,000 and 10% for the amount over $500,000; for homes priced over $1 million, the down payment is 20%.
A deposit on the other hand is an amount you pay towards your down payment when it’s time to make an Offer to Purchase. It is a figure that reflects your commitment and seriousness to the seller about buying their home. It indicates that you are financially capable of making the purchase and willing to take some risk until the transaction is completed. Unlike your down payment, the deposit does not have a minimum amount.
Appraisal Fee
If you are obtaining a traditional loan, your lender will almost certainly request an appraisal of the house you are to purchase. They do so in order to get a rough indication of the property’s entire market worth.
Because you are bringing your bank a significant amount of business, you may be able to bargain an exemption or partial waiver of the appraisal cost. In Ontario, these charges might range from $350-$700 or more.
Home inspection
If you agree to a home inspection as a precondition of your Offer to Purchase , the cost can range between $300 and $600 in Ontario. This cost depends on the home’s age, size, and neighborhood.
A house inspection is not compulsory, but it is usually advised. For example, if the sinks have leaks, you will want to be in the know before purchase. These factors can influence whether you buy the property or not and how much you are willing to pay.
Legal Fees
You cannot avoid paying disbursement and legal fees to your lawyer on closing day. At this point, the house is formally yours. The fees include any costs or expenditures your lawyer charged you and any fees or expenses they incurred on your behalf while working for you.
A lawyer’s costs often range from $500 to $1000 (plus GST/HST). Your real estate lawyer’s job entails a few key responsibilities. They ensure the legal paperwork is completed and filed appropriately, conduct needed title searches, and counsel you on possible problems. Your lawyer should also work with your lender for a smooth financial transaction.
Land Transfer Tax
A land transfer tax (LTT) is a percentage of the home’s purchase price imposed by each province in Canada, with the exception of Alberta and Saskatchewan. It is a percentage of the home’s purchasing price that is payed at the time of closing. Apart from the provincial LTT, there may also be a municipal LTT like in the case of Toronto.
A land transfer tax (LTT) is a percentage of the home’s purchase price imposed by each province in Canada, with the exception of Alberta and Saskatchewan. It is a percentage of the home’s purchasing price that is payed at the time of closing. Apart from the provincial LTT, there may also be a municipal LTT like in the case of Toronto.
LTT varies for each province. However, the higher the home’s value, the more the tax. As a first-time home buyer, you may be able to wave off some of this cost.
Title insurance
When buying a new house, It is advisable to acquire title insurance. After purchasing your house, title insurance will protect you if you have a property ownership issue. It is a requirement by your lender that you obtain this insurance, which may cost $150-$300 on the lower end in Canada, but it may go higher.
Title insurance can shield you from zoning issues, municipal work orders, and property flaws. Ordinarily, your lawyer will handle this for you and will include the amount as a part of their legal costs.
Property insurance
On the day of closure, you must have property insurance that covers the cost of rebuilding your property and its contents. Annual or monthly premiums are expected for this type of insurance. They will safeguard you from tragedies like fire.
Property insurance costs vary depending on where you reside and the sort of home you have. The average price of property insurance for a homeowner in Ontario is $1,250 annually.
Mortgage Insurance (CMHC)
In Canada, mortgage default insurance, also known as CMHC (Canada Mortgage and Housing Corporation) insurance, is a must for all property acquisitions requiring less than a 20% initial payment. Suppose you happen to cease making payments and default on your mortgage loan, this insurance shields the lender from losses. The amount of mortgage insurance required is dependent on the loan amount and your circumstances.
CMHC (Canada Mortgage and Housing Corporation) insurance premiums are fully paid at the beginning of the mortgage. So, if you plan to buy a house with a CMHC insured mortgage, be ready to pay these fees at the time of closing.
For those down paying more than 20%, CMHC insurance premiums are not mandatory, however, lenders may still take out a default insurance on your mortgage.
PST on Mortgage Insurance
The Provincial Sales Tax (PST) is a must-pay retail sales tax when buying taxable services or goods for private or entrepreneurial use unless an exception applies. It is included in the closing expenses and must be paid in full at closing in provinces like British Columbia. Your attorney will gather the funds and submit them to CMHC.
For example, if your CMHC premium is $7500 and the PST in your province is 7%, you’ll need to add $525 to your home closing costs.
GST/HST
You will not have to worry about land transfer taxes if you build a new home. But you will have to understand that new home acquisitions are subject to Goods Services and Tax (GST) or Harmonized Sales Tax (HST), depending on which province you reside. If your house is brand new, you may be liable to HST or GST, even though this amount may have already been a part of the contractor’s sale price. You will have to pay it at closing if this is not the case. You may potentially be eligible for a new home tax credit.
Water Tests
If purchasing a home with a well as the primary supply of drinking water, then this cost is for you. You should note that drinking water content is governed by very rigorous criteria imposed by Health Canada. This cost should be added to your Offer to Purchase after negotiating with the previous owner.
Septic Tank
When purchasing a home with a septic system, it is critical to have the system assessed by a certified septic engineer to guarantee that the septic tank is in good operating order. You can negotiate the price with the prior owner and include it in your Offer to Purchase. A septic tank inspection for home purchase can cost anywhere between $250-500 on average.
Estoppel Certificate
The cost is for anyone buying a condominium or strata apartment in Canada (except for Quebec). The certificate, which could cost up to $100, is sought by the lawyer for the purchaser’s closing transaction.
It includes the condo board’s financial documents detailing all standard fees related to your unit and the services you will receive in exchange. It also spells out all of the consequences for breaking the condo regulations. If any of the circumstances listed above are in question, the Estoppel certificate becomes usable in a legal capacity to resolve the problem.
How much are closing costs when buying a house?
Several variables will determine the exact bill of your home closing cost. Location and the type of home you are purchasing are factors to consider. It is good to set aside 1.5 percent to 4 percent of the home’s buying price.
The Bottom Line
We have given you some pointers on what you should expect to pay when purchasing a home in Canada. While not all of these fees may apply to your case, it is good to factor them into your budget when trying to buy a property.
Aim to save at least 4% of the purchase price to cover closing charges. By doing so, you may have enough money to complete your home purchase and cover any additional costs that may come your way.
Victor Irungu
Frequently Asked Questions
Closing costs are part of the purchase agreement between the buyer and the seller. The buyer typically pays the majority of the closing costs, although the seller may also be required to pay some fees.
To entice you to secure a house loan with them, lenders may occasionally cover a few of your closing costs. Under certain circumstances, some lenders will cover your legal fees and disbursements, and if your property is CMHC-insured, appraisal fees may not be charged.
Closing costs are one-time payments related to the sale of a home typically delivered to you, the buyer, for payment three days before the deal is completed.
All possible expenses include deposits, home inspection fees, appraisal fees, legal fees, land transfer tax, title insurance, property insurance, mortgage insurance (CMHC), PST on mortgage insurance and GST/HST. Fees for water tests, septic tank, Estoppel Certificate may be applicable in some cases.
Closing costs describe a variety of fees you can incur when buying a home. Lawyer fees, property transfer taxes, and inspection fees are examples of these charges. In most situations, they must be paid in full and cannot be rolled into your mortgage.
In exceptional circumstances, some lenders may settle your closing costs or incorporate them into your mortgage. Their action may relieve you temporarily, but you will pay extra for your mortgage if you roll your closing fees into your loan.
