Closing Costs are an important and often overlooked part of any home purchase. Typically they account for 1.5-4% of the selling price of the home and are comprised of the legal and administrative costs you are required to pay when the transaction closes. It’s always best to have a complete understanding of these costs prior to making your purchase. I’ll cover the most frequent costs here, however, there are usually additional expenses and events which may require payment before, on or after the home closes.
Closing Costs Required Prior to Home Closing
- Home Inspection Fee. A home inspection can be a critical part of the purchase decision and is generally recommended. In extremely competitive markets the home inspection cost may be borne by the seller in the form of a pre-list home inspection. Fee’s vary by area and scope but generally run between $300 and $600.
- Deposit for Purchase. Not to be confused with your down payment, the deposit counts as a portion of your down payment and is generally held by the listing brokerage in their trust account until closing.
Closing Costs Included in your Mortgage Financing
- Mortgage Default Insurance, sometimes referred to as CMHC insurance is added to the total mortgage amount for the property and amortised with the mortgage. Mortgage Default Insurance is required when purchasing a property with less than 20% of the purchase price as a down payment (high ratio mortgage).
Closing Costs Required at the time of Closing
- Land Transfer Tax is calculated as a percentage of the purchase price of the home and is applicable in all provinces although the amount payable in each province varies. Land Transfer Tax is payable on closing. You can use this calculator to determine the Land Transfer Tax amount payable based on purchase price. NOTE: some cities in Canada such as Toronto also charge a Municipal Land Transfer Tax.
- Legal Fees and Disbursement costs vary by both the property involved and the rates charged by lawyers. $500 (plus GST/HST) would be the minimum expected cost to prepare and record official documents. It’s always prudent to research lawyers and get confirmation of these costs ahead of time.
- Title Insurance is often required by lenders. Its purpose is to protect against losses which may occur if there is a dispute in property ownership. Title insurance is purchased through your lawyer and generally costs about $300
- PST on CMHC Insurance must be paid on the insurance at the time of closing and cannot be added to the financed amount.
Closing Costs Required for Some Properties
Some properties require additional closing costs reflective of the type of property being purchased. These include
- Septic Inspection may be required if the subject property has a septic bed. This cost could be negotiated with the seller as part of your offer or the results of this inspection may be critical to a condition in your offer. Price will vary by area.
- Well Inspection may be required if the subject property has a well. This cost could be negotiated with the seller as part of your offer or the results of this inspection may be critical to a condition in your offer. Price will vary by area.
- Water Test should be a critical condition of purchase for any home not supplied by municipal water. This test will provide a bacteriological analysis of the water supply to ensure there are no health concerns. Usually no cost to this service when completed by the local public health lab.
- Status (Estoppel) Certificate Fee usually required when purchasing a condominium. Review of this certificate is important to understand the current financial status of the condominium corporation. The certificate is generally provided by the property management company or the condominium corporation and may cost up to $100.
Closing Costs Usually Covered by the Lender
- Appraisal Fee which is often covered by the lender is a third party estimate of the value of your home completed by a certified home appraiser. The cost of the appraisal depends on the area rate but in general, will be between $250 and $400.
Other Closing Costs
- Property Insurance covers the cost of replacing your home and its contents. Lenders will require that this insurance is in place on closing. Property insurance is an ongoing cost often paid monthly or annually.
- Prepaid Utility Bills. If the sale of the home closes in the middle of a billing cycle you may be required to reimburse the previous owner for any prepaid costs which benefit you once title changes ownership.
- Property Taxes. Calculated as a percentage of your home value. In Ontario, home values are set and monitored by the Municipal Property Assessment Corporation (MPAC). Each municipality will set its own tax rate based on its operating budget and population. Often property tax is paid along with your mortgage payment.
Required on Closing Day
Closing day refers to the day you actually take possession of your home legally. All of your mortgage and legal paperwork should be completed prior to this day in order for your lawyer to conclude the transaction by transferring the down payment funds, mortgage funds from your lender and the deposit held in the real estate trust account. They will then transfer the deed to the property through the land registration system and provide you with the keys to your new home. These transactions do take some time and often homes don’t close until the afternoon so it’s important to plan your move accordingly.
Congratulations on your new home!