If you have spent any time at all considering a home purchase, you probably know that you have to pay closing costs when you sign for your mortgage. We have put together the best short guide to help you answer this question: How much are closing costs and what do they pay for in Canada? If you consult this guide, you will be better prepared for your mortgage, and you will benefit from time and money saved when you finally close your loan.
Closing costs are the final costs that borrowers in Canada must pay at the closing of their loan to finalize the mortgage agreement and take possession of the home that has been purchased. Such mortgage closing costs are made up of fees that are paid over and above the actual home price that the buyer and seller have agreed to.
The next section of this article will go into more detail as to specific closing costs for the buyer and what each fee in the closing cost total pays for. At this point, you should know that closing costs include things such as attorney fees, taxes, home appraisal charges, mortgage insurance and so on. Mortgage experts advise home buyers in Canada to expect to pay 1–2.5 percent of their home purchase price in closing costs, although homeowners who are required to buy mortgage insurance are likely to pay up to 5 percent depending on how much insurance they require. Obviously, it is a good idea to have as much saved as possible so that you are ready for any eventuality at your loan’s closing. Aiming for savings that total 2.5 percent of your home’s purchase price will help ensure that you have enough money for your closing costs.
As far as the specific sums that will be included in your mortgage costs, here is what you should expect.
Mortgage Insurance — Mortgage insurance, for those who must pay it, represents the largest single item included in loan closing costs in Canada. As noted in our guide to mortgage insurance, CMHC mortgage insurance or mortgage insurance from another insurer is required for all mortgages where the buyer cannot put a 20 percent down payment on his or her home purchase. Mortgage insurance will cost up to 2.75 percent of the loan amount depending on the size of your down payment. The larger your down payment, the less you will have to pay in mortgage insurance premiums.
Land Transfer Tax — Another significant portion of your closing costs will be your Land Transfer Tax, which is levied by most provinces to pay for provincial services. Some municipalities, such as Toronto, have an additional Land Transfer Tax as well. In any case, your Land Transfer Tax can average as high as 1.5 percent of your property’s value depending on where you buy and how much your property is worth.
Legal Fees/Notary Fees — You will pay a lawyer to prepare your loan contract, and you may also need the services of a notary to close your loan. Legal fees pay for these services, and they are charged per the hour according to how long document preparation takes. Typically, you can expect to pay around $500 to $1000.
Home Appraisal Fees — Lenders want to have an accurate understanding of your property’s value before they issue you a mortgage loan. They obtain this value through the services of a professional real estate appraiser, who may charge anywhere from $300–$500 to issue a certified real estate appraisal. In many cases, your lender will cover this fee since it is so important to protecting its investment in your mortgage.
Home Inspection Fees — Before you close your loan, you want to make sure that you have a full knowledge of all the home defects and problems that may come with your purchase. Most lenders will not allow a loan to make it to closing unless a home inspection has been carried out because they do not want to risk the buyer defaulting when he or she finds out some ugly truths about his or her purchase. Home inspections can cost as much as $500.
Harmonized Sales Tax — The Harmonized Sales Tax is charged in British Columbia, New Brunswick, Newfoundland and Labrador, Nova Scotia and Ontario. It is a combination of the Provincial Sales Tax and Goods and Services Tax that are charged in other provinces. Typically, the Harmonized Sales Tax is applicable only to new home purchases and not resale homes. However, buyers of a new home can often get a rebate on at least part of the tax depending on the home purchase price. Each province sets its own Harmonized Sales Tax, so the amount that you pay depends on where you buy your home.
Property Insurance — Lenders will want you to insure your residence, but insurance premiums can be paid separately and are not always included in real estate closing costs. Average home insurance premiums in Canada usually cost somewhere in the neighborhood of $700–$1,000 per year.
Title Insurance — Title insurance protects you in case any mistakes are made in the process of securing the property title, in case anyone shows up later with a claim to the property and so on. Title insurance is usually only a couple of hundred dollars.
New Home Warranties — In British Columbia, Ontario and Quebec, most buyers of new homes are required to purchase a new home warranty that will cover them if any problems arise within a certain time frame designated by the warranty. It is a wise investment even in provinces where it is not required, as it usually costs no more than $600 and covers you for many years to come.
These are the main costs that are often charged at closing in Canada. In most cases, the buyer is responsible for the majority of these house closing costs. However, sellers agree to pay the closing costs in many cases in order to facilitate the sale of the property.
As if closing costs themselves were not enough, there are other costs associated with your move to your new home, including fees for the moving company, home décor, furniture and more. It is important to keep these costs in mind as well so that you will have enough money after you pay your normal mortgage closing costs to enjoy your new home.
Some of the specific additional costs may include:
• Condominium or Homeowners Association Fees — If you have purchased a condo or a residence in a homeowners association, there will be a monthly assessment that goes toward keeping up your community. Sometimes, an advance deposit consisting of several months’ worth of these fees is required at closing. In other cases, you will pay these fees separately. Whatever the case may be, it is a good idea to have at least 3–6 months of fees saved so that you can pay any charges that arise.
• Moving Fees — If you hire a professional mover, there will be fees associated with hiring the truck and labor. Your cost for this will vary widely depending on how much stuff you have to move and how much packing the moving company does for you. Move small items yourself and pack as much as you can on your own to save money on moving costs.
• Service Hook-Up Fees — When you move into a new home, there are costs associated with hooking up electricity, water and other utilities. It is a good idea to contact your utility companies before you move in and pay the cost to hook up these fees. Have things turned on a day before the move to guarantee that your utilities are ready to go on moving day and to avoid paying for services that you will not need until you move in.
• Furniture and Décor — Setting aside additional funds for new décor is a wise move. No matter how well you plan, you will probably find that you need something for your new home that you did not foresee before you moved in. Having extra money set aside will help you be prepared for such things. The more you set aside, the more you can buy after you move in.
• Gardening and Debris Removal — Depending on the season that you move, you may need to have snow cleared, the grass cut and so on. Moving in the spring or early summer is recommended if possible, but if you cannot move at that time, have some money available to pay for any immediate gardening or debris removal that must be done to get into your home.
At your loan closing, you will sign all of your documents, pay your closing costs and take possession of your home. There is much to do to get ready. Keeping abreast of the potential fees for your mortgage is the best way to be prepared, and keeping a list of charges you must pay and marking it off as you save enough money to pay each one will help you plan as well. Finally, consult your mortgage broker or lending officer regularly in order to know how much you need to bring to your loan’s closing. You will want to have your bank cut a certified check for the final sum that your lender requires from you at closing in order to cover all of the aforementioned fees. As long as you bring the right total to your closing, the process should go smoothly. You will still have to sign a lot of papers, but you can rest assured that you have enough funds to secure your property.
Closing day should run smoothly as long as you are prepared. You will most likely close your loan at the office of the lawyer or notary that is working on your mortgage. The date will be determined based on when the lender can disburse your mortgage funds. Here is what will happen on that day:
1. Your lawyer or notary will receive the money from your lender for your home purchase.
2. You will give the funds to pay your down payment and closing costs to your lawyer or notary.
3. Your lawyer or notary will pay the seller and other associated parties for the home using the aforementioned funds.
4. Your lawyer or notary will register the home in your name.
5. Your lawyer or notary will provide you with the keys to your new home as well as your deed.*
*Throughout the closing process, you will be signing a lot of forms. Ask your lawyer if any signing can take place ahead of time so that you may shorten the closing process.