Money 101: Closing Costs

Offer accepted, mortgage approved, down payment made. You’re in the final round and feeling gooood. And then comes The Slobberknocker. Closing costs. Right from left field.

When buying real estate, the down payment and mortgage costs are only part of a financial punch to the gut. There are other legal and administrative costs that need to be settled before closing. These fees are once-off, but can add up. You need to budget for them right from the beginning when deciding on your offer price.

Some of the closing costs we have listed below are optional, but many will have you cornered.

How hard am I going to be hit?
The total amount of your closing costs will depend on several factors, including where in the country you live and what kind of home you’re buying. As a rule of thumb, you can estimate closing costs in BC at between 3-5 % of the purchase price. So, if we pick 4% on a $500,000 home, we’re looking at $20,000. Ouch.

While not all of the costs mentioned below will apply to your specific purchase, it is generally recommended to bank on about 1.5%-4% of the purchase price of the home for closing costs.

The Slow-Mo Replay
Below, we’ve put together a nifty step-by-step guide of closing costs incurred by homeseekers.

Home inspection.
Although not strictly a closing cost, and optional in Canada, budgeting for a home inspection is a good idea. We know what you are thinking: optional equals ‘heck no’. But it really is a good idea. Trust us. An inspector will assemble a report for a fee of around $500, giving you assurance that the home is safe and in proper working order before you put in your offer. They say you can’t put a price on peace of mind. Well, turns out you actually can.

Property appraisal fees.
An appraisal (an estimate of the value of your home) is *sometimes* covered by your mortgage lender. Appraisal fees can range anywhere from $350 – $550 for a standard property.

Property survey fees.
Your lender may ask you for a survey outlining your property’s boundaries, identifying setbacks, buildings, or other restrictions that may impact the property’s value. Your seller might have one they can give you, otherwise you’ll possibly be hiring a professional land surveyor to do the job. Costs vary, but you can expect to pay between $1,000-$2,000 for a proper survey.

Water & Septic tank inspection.
If you are going off grid and buying 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 order, and that there is enough potable water on the property. Our thinking is that a shower and a working loo are pretty important.

Estoppel certificates.
If you are buying a condo or strata unit outside of Quebec, then an Estoppel Certificate fee will be necessary - and could cost up to $750 (it’s called a Strata Form B in BC). There are two reasons a homeseeker might need such a certificate: the condo corporation (for example) completes an estoppel certificate to confirm that the seller does not owe them any money (and confirming certain terms about shared property); or you are buying a property as an investment and the tenant signs this contract to verify their rental agreement (confirming details such as their lease, rent amount, security deposit details etc.). “Estoppel”. Yup, that’s a 9000 on the weird word scale.

Title insurance.
Most lenders now require title insurance. This protects you and the lender from any real estate fraud, municipal work orders, zoning violations etc. Sounds unpleasant. Usually, your lawyer will take care of this for you and add it to their legal fees. The cost for title insurance can range between $100 - $300, but can sometimes be higher.

Property insurance.
Property insurance, often called “home insurance”, covers the contents of your home in the event of fire or other disasters. This insurance is often paid in monthly or annual premiums. The cost of property insurance will depend on where you live and what type of home you have. In Ontario, for example, the average cost of property insurance paid by a homeowner is $1,250 per year.

Land Transfer Tax.
Calculated as a percentage of the purchase price of your home, all provinces (with the exception of Alberta and Saskatchewan) have a Land Transfer Tax (LTT) payable on closing, the amount varying by province. Some cities, such as Toronto, also have a municipal LTT. First-time home buyers may be exempt from paying land transfer tax, but the rest of us gotta pay (except if you live in Alta. or Sask. obviously).

GST/HST on new construction housing.
Building a new home means you are exempt from Land Transfer Taxes, but instead you’ll need to consider GST (or HST depending on the province you live in). If the builder has included the GST/HST in the purchase price, you can finance it with the mortgage. If not, it becomes part of your closing costs.

Legal Fees and Disbursements.
On closing day, you can expect to pay your lawyer a minimum of $500 for their fee and any expenses they had to pay on your behalf while working for you. To help keep costs down, phone around and compare fees before settling on a lawyer. You don’t want to give them a cent more than you have to, right?

Prepaid utility bills and Property Tax.
If the previous owner of your property has pre-paid property taxes or utilities, you will need to reimburse them for these. Property tax is an annual expense and is calculated as a percentage of your home value. The residential property tax rate in Toronto, for example, is 0.83%. On a $400,000 home, would be equal to $3,320 per year. If the previous property owner pre-paid this tax for the full year, you would need to reimburse them accordingly.

Provincial Sales Tax (PST) on mortgage default insurance.
Mortgage default insurance, sometimes called CMHC insurance, is not normally considered a traditional closing cost as it is added to the total mortgage you require and amortized over the life of your mortgage. PST on the insurance must, however, be paid in cash at the time of closing. The amount will vary, depending on the CMHC premium and the province you live in.

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