Buying a home for the first time is doubtlessly a stressful time. From saving up to make the down payment to securing a mortgage and conducting any repairs on the home, the experience can be as time-consuming as it is expensive. However, being prepared for all costs involved at each stage of the process can save a substantial amount of time, energy and money at a later date. In particular, one cost group that buyers tend to overlook is that of closing costs.
What are closing costs?
You’ve taken care of the down payment. You have identified the minor repairs that need to be made to get the house in perfect living condition. And you have paid the broker his/her commission. That’s it, right? Not quite. The last thing that needs to be taken care of is closing costs. These costs have less to do with the financing of the property and are more related to the transactional costs of purchasing the property.
A general rule of thumb for closing costs is between 2% to 3% of the overall property price i.e. if the property is worth $500,000, then closing costs can accumulate to up to $10,000 to $15,000.
Types of closing costs.
Land Transfer Tax: The provincial and/or municipal government charges land transfer tax on resale homes. This is most likely the biggest component of overall closing costs, and the actual amount is based on the purchase price of the property, as well as other factors. The tax amount varies by province while some cities may charge an incremental land transfer tax at a municipal level as well. Please note that these are paid on or after closing day, and first-time buyers may be able to receive a rebate for a part of the cost.
Land Survey Fee: This is generally a flat rate fee between $1,000 and $2,000 that is a lender requirement. The land survey results essentially help to segregate where the property ends and where the neighbour’s property begins to prevent confusion at a later stage.
Legal Fees and Reimbursements: Once an agreement is reached between the buyer and the seller, lawyers enter the picture to complete the transaction. From the initial Offer to Purchase document to the final handover of the keys, legal teams are critical to ensuring a successful close. From a base of $500, these fees can easily escalate to $1,000+ depending on the level of service desired by the buyer.
Property Insurance: In Canada, it is mandatory to have property insurance on a home upon closing. At the very least, this insurance should provide coverage over fire or other damages for the full value of the home. However, buyers can go a step further and purchase coverage for their personal belongings such as furniture, jewelry etc. Because this insurance is tied directly to the value of the home and can vary depending on the company and policy purchased, property insurance costs can often take on a wide range.
Property Appraisal Fee: Lenders may require a property appraisal to estimate the property’s value before they extend a mortgage. This is to ensure that the buyer is not overpaying for the value of the house and that they have sufficient margin from a loan-to-value standpoint. Without getting too granular, the Loan to Value ratio (LTV) determines how much of the total property value is financed by a loan. Hence, if an appraiser places the valuation at $1M and the mortgage is for $800,000, then the LTV is 80%. From a lender’s perspective, having a high LTV ratio would represent additional risk for them.
GST/HST: If a buyer is moving into a newly constructed home, or one that has seen a major refurbishment, GST/HST may be paid on the purchase price of the home. If the buyer is moving into a condominium, then an estoppel certificate fee ($100) may also be required.
Inspection Fees: While not mandatory, it is helpful to know everything about a house prior to moving in – whether it’s good or bad. A home inspector can therefore be useful in this regard. Prior to making an offer, the inspector can check the entirety of the home to ensure that it is in adequate living condition. This can then influence the purchase price of the home and provide an added degree of comfort to the buyer.
Prepaid Expenses: In some cases, previous homeowners may have prepaid some expenses such as utility bills. They would then need to be reimbursed by the new owner of the property. Similar to inspection fees above, these are not certain costs that have to be paid, but may be a requirement if prepayments have occurred.
Moving Costs: Congrats, you are ready to move in! While you can certainly skip this step by moving in with the help of family/friends, these are the final costs that have to be paid before you are ready to call your new house a home.