Closing Costs: The Complete Guide

closing cost

To make things easier, it’s important to know the steps involved in buying a home. One of the things you’ll need to deal with is closing costs. It is said that purchasing a home can be stressful. In this article, we will examine the various expenses you will face in order to finalize your home purchase. But first, what are the closing costs?

Closing Costs: What Are They?

In addition to the down payment and mortgage costs, you’ll incur a number of legal and administrative fees during the closing process.

What Are Closing Costs?

In order to budget for closing costs, you should always allocate 1.5% – 4% of the home’s purchase price, or $4,500 – $12,000 for a $300,000 home. For a better understanding of what fees you may encounter when purchasing a new home in Canada, you can use the closing cost calculator. For more insight, you will need to enter the purchase price, the down payment percentage, and the type of property your property is in.

Canadian Closing Costs

There are several closing costs that a home buyer is expected to cover. These may not all apply to your situation, but it’s best to be informed to avoid any surprises.

Fees for legal services

Lawyers charge a fee for preparing the necessary documents, making disbursements, and registering mortgages with land title offices.

Tax on land transfers

Most home buyers overlook this expense. Every province in Canada has something called a land transfer tax, which is a percentage of the price of the home. This tax was introduced in the 1970s as an additional revenue stream for cash-strapped municipalities. First-time home buyers are sometimes exempt from paying land transfer tax, and the percentage varies from province to province. The more expensive the home, the higher this amount will be.

CMHC premiums are subject to provincial sales tax

If you’re putting down less than 20%, your mortgage needs to be insured with Canada Mortgage and Housing Corporation (CMHC), Genworth, or Canada Guaranty in order to shield the lender from potential losses if you’re unable to fulfill the mortgage agreement. The premium is usually financed, but you’ll have to pay Provincial Sales Tax on CMHC’s portion in advance of closing. The exact amount varies by province and CMHC costs.

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Fees for home inspections

You are expected to cover the cost of the home inspection if you had one done as a condition of your purchase, which should fall somewhere between $300 – $500. While a home inspection is not mandatory, it is always recommended.

Fees associated with appraisals

An appraisal of the home you’re buying is usually requested by the lender when you apply for a conventional mortgage (at least 20% down payment). For a standard property, appraisal fees can range from $350 – $550. As you are giving your bank a substantial amount of business, you may be able to negotiate a waiver, or partial waiver of the appraisal fee.

A title insurance policy provides protection in the event of a property ownership dispute after you purchase a home. Title insurance can cost upwards of $300 and is a requirement of your lender. The lawyer will collect the premium at closing.

Taxes on property

It is not uncommon for you to be required to pay a portion of property taxes at time of possession, even though property taxes are not necessarily a closing cost. If you live in a municipality where you reside, this may also apply. As an example, let’s say that you are purchasing a property in the middle of the year (July 1) and the seller has already paid the municipality’s property taxes.

As a credit to the seller, the seller may be reimbursed for the taxes paid for the portion of the year that they will not own the home.

Rural properties incur additional closing costs

To ensure that both the septic system and the well water on a rural property are in good working condition and that there is plenty of potable water on the property, your lender may require testing of both. It is usually the home buyer who pays for this cost.

Buyer-Specific Closing Costs

Although the closing costs listed above are always required by law, some closing costs are only incurred by a select number of buyers.

Mortgage insurance provided by CMHC

In Canada, any home purchase made with less than a 20% down payment requires mortgage default insurance by law. Mortgage default insurance protects the lender in case the borrower defaults on their mortgage. CMHC insurance premiums must be paid in full at the beginning of the mortgage, so be prepared to pay these costs when you close if you plan to get a CMHC-insured mortgage.

You can use a mortgage default insurance calculator to help you better understand how much money your CMHC insurance might cost on your mortgage. The average Canadian spends 2.8% – 4.0% of their mortgage on this insurance, but it enables them to qualify for a mortgage who otherwise would not be able to do so.

Adjustments to property taxes

Property owners are obligated to pay their property tax on an annual basis and depending on your locality, you have the flexibility to pay in monthly, quarterly, biannual installments, or in one full payment. In the event that a seller you’re set to purchase from has already paid for the property tax year, you must reimburse them for a prorated segment from closing day up until the date they have paid through. This figure should be noted on your Statement of Adjustments and requires that you prepare cash to cover the sum upon closing.

NSRT (Non-Resident Speculation Tax)

On April 21, 2017, the Province of Ontario introduced a 15% tax on the purchase or acquisition of an interest in residential property located in the Greater Golden Horseshoe Region (GGH) by individuals who are not citizens or permanent residents of Canada or foreign corporations (foreign entities) and taxable trustees. In addition to the general land transfer tax, Ontario’s Non-Resident Speculation Tax (NRST) applies.

The NRST applies to the transfer of land containing at least one single-family residence (but not more than six). In addition to detached houses, semi-detached houses, townhouses, condominiums, and condominium units, land containing one single family residence is also considered a single-family residence.

Adjustments to interest rates

The interest adjustment is the amount of interest accrued between the closing date and the day your first mortgage payment is due. This extra charge can occur when the first mortgage payment isn’t made until after the closing date, meaning interest begins to accrue in the interim.

If your mortgage rate was 2.89% on a home costing $250,000, the total interest would equal $7,225. You can calculate the daily rate of interest simply by dividing that by 365 days in the year; $19.80 per day. When you multiply this figure by the number of days between both transactions, it will give you how much in adjustments you owe in added closing costs – which may not always be significant but worth knowing about before proceeding with a purchase.

On new construction housing, GST/HST is applicable

Constructing a new house means you won’t have to take land transfer taxes into account; however, GST (or HST depending on which region you are in) must be taken into consideration. If the builder has put the tax in the sales price, you can incorporate it with your mortgage; otherwise, it will become part of your closing costs. However, these fees can come as an unpleasant surprise since they add up quickly. That’s why it is important to inquire about how taxes will be applied early, so you can prepare for any unexpected expenses when buying your home.

Reducing Closing Costs

In addition to budgeting for closing costs, here are a few ways to reduce them:

Before choosing a lawyer, compare legal fee rates

Find a lender who offers rebates on new mortgages to offset the cost

Land transfer taxes are lower when your home purchase price is lower

In Canada, who pays for closing costs?

In most cases, the closing costs, such as those listed above, are covered by the buyer. Usually, the lender covers the appraisal fee ($250 – $350) to determine the estimated value of your home.

It’s impossible to calculate an accurate estimate of your closing costs ahead of time. It’s advised to plan for the legal fees, down payment, and a home inspection. The minimum you should be prepared to pay is 1.5% on top of the down payment. If you’re selling a property as well, setting aside 4% – 5% is wise.

What are the closing costs?

At the time of signing the mortgage registration documents, you will pay your lawyer your closing costs, along with your down payment. Your lawyer will inform you in advance of the total payment required, and they will distribute the various amounts to the appropriate recipients. This usually happens about a week prior to the closing date.

Using RRSP funds to purchase a home

To pay for their down payment and closing costs, first-time homebuyers can borrow money from their Registered Retirement Savings Plan (RRSP). In order to avoid penalties under the Home Buyers Plan (HBP), withdrawn funds must be repaid into an RRSP within 15 years.

Be sure to leave plenty of time to withdraw your funds prior to closing if you are using the HBP. My advice is to speak to your bank or investment advisor early on, to find out when you should withdraw your RRSP funds. Depending on how your RRSP is invested, there may be a delay.

Closing Costs: A Final Word

As you can see, there is plenty to consider when it comes to closing costs. Since there are so many different fees and expenses involved, it can be difficult to keep track. Try to save at least 2% – 3% of the purchase price to cover closing costs. You can then look for ways to slash some of the costs using the tips mentioned above. That way, you’ll know you’ll have enough money to close your deal.

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