Guide: Closing Costs | Costs of buying a house

Closing costs can be defined as all the additional money you will have to pay on top of the purchase price of the home you are buying when your home purchase closes and these can include taxes (GST/HST/PST, land transfer taxes), property taxes, appraisals, inspections, legal fees, lender fees and title insurance if any of them are applicable.

The term “closing” refers to the act of signing the mortgage loan and conveyancing documents that will officially make you the home owner, in other words you have purchased a home. Here are a few examples of some of the closing costs you might encounter.

• Land Transfer Tax – This is calculated as a percentage of the purchase price of your home, only Alberta and Saskatchewan don’t require a Land Transfer Tax that’s payable on closing. However, the amount itself varies from one province to another.
• Legal Fees – It’s normal to incur legal fees ranging from $500 up to $2,500 (GST/HST included) for a residential real estate lawyer to complete your transaction depending on the type of mortgage being completed. These costs account for the preparation and recording of legal documents, title insurance and registering ownership on the title of the property.
• Title Insurance – Most lenders will need title insurance to make sure they are covered against potential losses if a property dispute were to arise. Ordinarily, this can be purchased from a lawyer or a notary and can cost $100-$300.
• GST/HST – Jurisdictions that charge GST/HST on new home purchases will be added to the purchase price and is typically accounted for in the mortgage.
• PST on mortgage default insurance – Mortgage default insurance is financed through your mortgage. PST is usually paid by cash when you close on your home.
• Property Taxes – This is calculated as a percentage of your home value. It must be paid yearly, and the amount can vary from city to city. If the previous owner has already paid property taxes for a full year you may be asked to reimburse them as part of the closing costs. You may also have the option of setting up an automatic payment plan with your lender or financial institution for future property tax payments.

Outside of the closing costs listed above, there may be some additional costs that you might want to prepare for when you’re ready to complete on your house purchase. Those are:

• Property Insurance – This will cover the cost of replacing your home and all the contents within it. This insurance is paid either monthly or annually and must be in place on closing day (the day you take ownership of the property).
• Prepaid Utility Bills – There’s a chance you’ll have to reimburse the previous owner for costs that have already been paid for, like property taxes and utilities for example.

It’s recommended that you should set aside at least 2.5% of the home’s purchase price for closing costs for homes under $1,000,000 and up to 4% for homes over that purchase price. For instance, if you’re buying a house $400,000 you should set aside at least $10,000 for closing costs. Important: you’ll need to show proof that you can afford to set aside a minimum of 1.5% of the purchase price in order to qualify for a mortgage loan insurance.

This is the day you take legal possession of your home. By this point you will have completed the majority of your administrative tasks like transferring the balance of your down payment to your lawyer in trust. This process can take time especially when you’re trying to withdraw funds from your RRSP (Registered Retirement Savings Fund) or other investments so plan a couple of weeks ahead for this situation.

On the day itself, this is what you can expect:

1. Your lender will hand over the mortgage funds to conveyancing lawyer or notary.
2. You provide the balance of your down payment and closing costs to your lawyer or notary, it is recommended this happens the day before if the down payment is coming from any other source than the sale of a previous property (which is likely to be closing on the same day).
3. Your lawyer will pay the previous owner, any outstanding mortgages and register the home in your name at the land titles office in the appropriate region.

Canadians have the option of borrowing money from their Registered Retirement Savings Plan (RRSP) which can be used to purchase a home for a first-time buyer. However, this amount can only be borrowed under the Home Buyers Plan (HBP) and the funds withdrawn must be repaid within a 15-year time period. Not doing so can result in you incurring income tax on funds withdrawn from your RRSP, as these funds are treated as income if they’re not repaid.

Keep in mind that if you do decide to utilize the HBP, ensure that you leave ample time before closing as withdrawing the funds can take some time. Based on how your RRSP is invested there could be potential delays in receiving the funds. However, it’s recommended that you consult with your bank or financial advisor beforehand to assess when the right time to withdraw is.

Mortgage Maestro can help you secure a mortgage from a variety of lenders to help complete your real estate purchase transaction. We have access to an expansive network of lenders who we will consult with on your behalf and find the best mortgage and rate for your needs.

Contact us today, and we’ll have an experienced mortgage professional reach out and help you find the best possible solution when it comes to closing costs.

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