A Guide to Mortgage Closing Costs in Canada
Jamie David, Director of Marketing & Mortgages
Closing costs, ranging from 1.5 to 4% of the purchase price, are the legal and administrative costs you will need to pay when your house closes. In addition to closing costs, there are other expenses and/or events that may require a cash outlay before, on or after your house closes. We will outline these in detail to ensure these often unexpected costs do not sneak up on you.
Cash outlays required before your mortgage closes
- Home Inspection Fee. It is highly recommended that you contract a home inspection as a condition of your Offer to Purchase. A home inspector will assemble a report on the condition of the home for a fee of around $500, depending on the complexities of the inspection.
- Deposit. A deposit that counts towards your down payment is required when you make an Offer to Purchase. A deposit shows the seller you’re serious and committed to buying their property. It signals that you have the financial means to make the purchase and you’re comfortable taking on some level of risk until the deal closes. Unlike your down payment, there is no minimum required amount for the deposit.
Costs financed in your mortgage
Mortgage default insurance, sometimes called CMHC insurance, is not normally considered a traditional closing cost, as it is added to the total mortgage you require and amortized over the life of your mortgage. We have chosen to include it here to point out the major difference between it and traditional closing costs: it does not require a cash outlay upon closing.
- Mortgage default insurance. If you purchase a house with less than a 20% down payment, you will be required to buy mortgage default insurance, commonly referred to as CMHC insurance. This protects the lender in the case the borrower defaults on the loan.
Mandatory closing costs covered by the home buyer
The following is a list of closing costs that are incurred by the home buyer:
- Land Transfer Tax. Calculated as a percentage of the purchase price of your home, all provinces except for Alberta and Saskatchewan have a Land Transfer Tax (LTT) payable on closing, with the amount varying in each province. Some cities, such as Toronto, also have a municipal LTT.
- Legal Fees and Disbursements. You can expect to incur a minimum of $500 (plus GST/HST) on legal fees for a residential real estate lawyer, which account for the preparation and recording of official documents.
- Title Insurance. Today, most lenders require title insurance to protect against losses in the event of a property ownership dispute. This is purchased through your lawyer/notary and costs $100 - $300.
- PST on mortgage default insurance. Though mortgage default insurance itself is financed through the mortgage, PST on the insurance must be paid in cash at the time of close.
The following is a list of closing costs that are incurred by some home buyers, as they are only applicable to certain properties:
- Septic Tank. If the house has a septic tank, it should also be tested to ensure it is in good working order. Once again, you can negotiate the cost with the previous owner and list it in your Offer to Purchase.
- Water Tests. If the home has a well, you will want to test the quality of the water and ensure there is an adequate supply and the water is potable. You can negotiate these costs with the previous owner and list them in your Offer to Purchase.
- Estoppel Certificate Fee (does not apply in Quebec). A certificate fee may be payable if you are buying a condominium or strata unit, and could cost up to $100.
Mandatory closing costs often covered by the lender
- Appraisal Fee. An appraisal, which is an estimate on the value of your home, is often covered by your mortgage lender. An appraisal is performed to certify the lender of the resale value of the home in the case you default on the mortgage. The cost is usually between $250 and $350.
Other costs to consider
- Property Insurance. Property insurance, which covers the cost of replacing your home and its contents, must be in place on closing day. This insurance is often paid in monthly or annual premiums.
- Prepaid Utility Bills. You may need to reimburse the previous owner of your property for pre-paid costs such as property taxes, utilities and so forth.
- Property Taxes. Property tax is calculated as a percentage of your home value, varies by municipality and must be paid each year. The residential property tax rate in Toronto for example is 0.83%, and on a $400,000 home, would be equal to $3,320 per year. You may need to reimburse the previous property owner if he/she has already paid property taxes for the full year. You are also given the option to set up an automatic payment plan with you lender. Your lender will set up an account for you, collect an additional $277 per month ($3,320 / 12 months) and then pay property taxes on your behalf. Though by no means necessary, some homeowners find this service extremely valuable for budgeting purposes.
Closing Day is the day you finally take legal possession of your home. It's important the bulk of your administration is completed by this point, including transferring your down payment to your lawyer. Transferring down payment funds, especially from your RRSP, can take time, and should be done several days before close.
On the Closing Day, the following events will take place:
- Your lender will provide the mortgage funds to your lawyer/notary.
- You must provide your down payment, less the deposit, to your lawyer/notary along with the closing costs.
- Your lawyer/notary pays the previous owner, registers the home in your name and gives you the deed and keys to your new home.
Congratulations! You are now ready to move in.