If you’re looking to buy a new home, you may have heard of the term “closing costs”. Closing costs are associated with new mortgages, or more specifically, the sale of a house.
But what exactly are closing costs, and how much will you have to pay for them? Let’s take a look.
What are Closing Costs?
Anytime you complete a mortgage deal in Canada you will be charged closing costs. These are the fees associated with closing your mortgage and include things like legal and administrative expenses.
The buyer of the home is expected to pay closing costs on the closing date of the home. In most cases, these fees cannot be included within your mortgage, so it’s important that you consider them when budgeting for your new home.
Types of Closing Costs in Canada
You might expect to pay many different types of closing costs when buying a new house in Canada. These include, but are not limited to:
- Appraisal fees – Most mortgage lenders will require you to have a house appraised before they lend you the finances to buy it. This is to help ensure that the home will hold its resale value should you default on your mortgage. In almost all cases, you will be responsible for the fees associated with an appraisal.
- Home Inspections – Before you purchase any home, you’ll want to make sure it’s in sound condition. A home inspection is designed to ensure that a home is up to building standards and spot any problems you may run into in the near future. Home inspections are designed to protect the buyer, ensuring that they are aware of any potential problems before they buy. The buyer is responsible for the costs associated with any inspections.
- HST/GST – Like any other purchase in Canada, homes may be subject to rates of HST/GST. The good news is, this type of tax is generally only charged on new homes, so if you are purchasing an old home, you may be exempt from paying these. In some circumstances, you may also be given rebates by the government, though certain conditions may apply.
- Legal Fees – Anytime you use a lawyer to purchase a home, you will be charged legal fees upon the close. These fees are charged for the lawyer’s time that it takes to draw up the mortgage and title. Costs for legal fees can vary greatly depending on which lawyer you use.
- Land Transfer Taxes – Quite possibly the most significant fee associated with closing a home; Land Transfer Taxes are a one-time payment that the purchaser of a home must make when transferring land from one owner to another. How much you have to pay will depend on your location and the purchase price of your home. First-time homebuyers may be able to apply for a rebate for these taxes.
Of course, these are just a few of the many different types of closing costs in Canada. Other closing costs you might expect to run into include survey costs, interest adjustments, statements of adjustments, and title insurance, to name just a few.
Be sure to speak to your real estate agent and your lawyer to ensure that you have a firm understanding of all closing costs associated with your purchase before signing any final documents.
How much are Closing Costs in Canada?
Closing costs will vary significantly from home to home, depending on the location and value of the property. As a general rule of thumb, you should expect to pay somewhere between 3-4% of the home’s value in closing costs.
Of course, this is just a rough estimate, and closing costs can be more or less than this as well. You can work with your attorney to ensure that all closing costs are within an acceptable range and help you understand exactly what your fees are going towards.
Budgeting for a Down Payment
In addition to all of the other closing costs you need to consider within your budget, most lenders will also require you to put a down payment towards the cost of your new home.
A downpayment is the amount of money you will put towards your home upfront. It is deducted from the overall cost of your home and taken off of your mortgage.
Exactly how much you need to put down will depend on the value of your new home. If, for example, your new house is less than $500, 000, you are only required to put down 5% of the purchase price.
If your home is over $1 million, on the other hand, you are expected to put down at least 20%. In some cases, you may also be expected to purchase loan insurance in addition to your down payment.
Who pays closing costs at closing on a home?
Typically, the homebuyer pays most of the closing costs. However, costs like the commission of the real estate agent are typically handled by the seller.
The Importance of Budgeting for a New Home in Canada
When looking to purchase a new home in Canada, you must do two things: budget and save and obtain your mortgage. If you have a stable income and can prove job stability and good credit, you should be able to obtain a mortgage from a lender.
The amount that you can obtain will depend on several factors, including how much you make and your credit score.
But just because you are approved for a mortgage doesn’t mean that you are ready for a new home. You must also factor in the closing costs.
Again, these costs are not factored into your mortgage, so you must have enough cash to be able to pay them upfront. This requires savings and budgeting.
Again, you should have at least 5% of your new home’s purchase price set aside for closing costs and unexpected fees associated with buying a new home.
Maintaining Your New Home
It’s also important to remember that the costs and fees associated with a home in Canada do not stop with the closing costs. For as long as you own your new home, you will have a variety of monthly costs to consider.
Your main cost will be your new mortgage, but you should also factor in the costs of things like hydro and gas, water, home insurance, and other fees associated with homeownership.
If you are purchasing an older home, you will also want to factor in the costs of upgrades and upkeep. Depending on the home’s condition, you may need to invest in things like upgraded appliances, window treatments, new paint, and other home renovations.
All of these things can add up, so you must have a strong budget set aside to ensure you don’t fall behind on any payments.
In conclusion, anytime you purchase a new home or property, you should expect that there will be closing costs associated with that purchase. Closing costs cover a wide range of fees and generally cost between 2-5% of the house’s value.
Always be sure that you have saved and budgeted for these fees before applying for your mortgage to ensure that you can afford to close the sale of your new home.
If you are unsure of the fees associated with the closing sale of a home, be sure to speak to a real estate lawyer. They will be able to inform you of all necessary fees and will be able to explain exactly where your payments are being divided.
If you feel uncomfortable with any of the associated fees, be sure to speak up about your concerns to be sure that you are not being taken advantage of.