You may think when you finally get the keys to your brand new home you’re finished with the upfront costs. But there’s one last set of bills to pay – namely, the closing costs. Here’s what you need to know so you don’t face last-minute surprises. 

What are closing costs in Canada?

A number of extra administrative and attorney fees occur right at the end of the home-buying process. These are referred to as closing costs, which are over and above your down payment and the ongoing cost of your mortgage payments. 

As a rule of thumb, such fees add up to 1.5 percent to 4 percent of the purchase price of your home, which isn’t exactly a drop in the bucket. In order to keep your stress level down, it helps to know what those closing costs are and how much each one is likely to set you back. 

Costs before you get a mortgage

Before your mortgage even closes, you’ll face a couple of additional expenses, including:

• The home inspection fee – It’s a good idea to hire a home inspector to assess the home as a condition of your Offer to Purchase. For a fee in the range of $500, the home inspector can clue you in on any potential problems with the property so you go into the transaction with your eyes wide open.  
• The deposit – When you make an offer to purchase, you’re expected to put your money where your mouth is by making a cash deposit to show the seller you’re committed to buying the property. The deposit goes toward your down payment and assures the seller you have the financial means to make the purchase. Unlike the down payment, there is no minimum required amount for the deposit. 

Costs associated with your mortgage

If you buy a house with a down payment of less than 20 percent of the home’s value, you will have no choice but to buy mortgage default insurance from Canada Mortgage And Housing Corporation (CMHC), Genworth or Canada Guaranty. Unlike most insurance, this does not protect you. It’s meant to protect the lender if you can’t make your loan payments. The amount you’ll pay for CMHC insurance depends on the home’s purchase price.

Mortgage default insurance isn’t normally considered one of the traditional closing costs because it doesn’t require an immediate cash outlay. Instead, the cost of CMHC insurance is added to the total mortgage you need, and the amount is amortized (gradually reduced) over the course of your mortgage. We’ve included it here, though, because you need to know about it. 

Common closings costs

When budgeting for your home purchase, you need a clear idea of the last-minute costs you will have to swallow.  Below is a list of the common closing costs: 

Legal fees

You’ll need a lawyer to administer the home purchase transaction, and you can expect to pay a fee to pay for the service, which involves preparing the necessary documents, making disbursements (out-of-pocket expenses such as court filings or courier service) and registering your mortgage with the land titles office. They’ll take care of things such as the title search fee and survey fees and bill it back to you.

Land transfer tax

Many buyers overlook this expense, but the land transfer tax can be costly. It’s calculated as a percentage of the purchase price of a home and was originally intended to generate revenues for cash-strapped municipalities. Now every province has a version of it, although the percentage owing varies from province to province. As a rule of thumb, the more you’re paying for your home, the higher the land-transfer tax. On the plus side, sometimes first-time home buyers are exempt from the tax. 

Appraisal fee

When you take on a conventional mortgage (meaning you have a minimum 20 percent down payment), lenders generally ask for an appraisal to confirm that the market value of your property is accurate.   Appraisal fees range from $350 to $550 for a standard property. Although you have to cover the appraisal fee, typically your lender chooses the appraiser. 

Title insurance

Your ownership of a property is legally referred to as a ‘title.’ And title insurance is meant to protect you if you end up in a property ownership dispute after you purchase your home. (For example, if the previous owner still has outstanding debts on the property, is behind on property taxes, or has taken a second mortgage on the home.) The insurance costs upwards of $300, and lenders require you to purchase it. Your lawyer will collect the premium at closing.

Provincial sales tax on mortgage default insurance

As mentioned earlier, if you need CMHC insurance, you generally pay over time through your mortgage. Unfortunately, you still have to pay the provincial sales tax on the CMHC premium up-front before you can close. Exactly how much you’ll pay depends on the cost of the premium and the province where you live. 

Additional closing costs for rural properties

If you’re buying a home in the country, your lender may well insist that your well water and septic system be tested to ensure they’re in good working condition. This cost usually falls on the home buyer.

Additional costs to consider

The following expenses don’t fall under the umbrella of closing costs, but they do take place at the end stage of the home-buying transaction, so we wanted you to know about them. 

Real estate agents’ commission

If you’re buying a home, you won’t pay your real estate agent any fees. However, if you’re selling a home to fund your new home purchase, expect to pay about 5% of the sale price to your real estate agent. Sometimes your real estate agent will offer discounts if you buy and sell with them.

Estoppel certificate

If you’re buying a condo, an estoppel certificate may be payable if you are and could cost up to $100.

Property taxes

Property taxes are generally an annual expense, and you may not necessarily regard them as a closing cost. But depending on where you live and when you take possession of your home, you may have another upfront cost to pay. 

For instance, let’s say you close on your new home in mid-June, and the previous owner has already paid the property taxes for the entire year. Before you can take possession of the property, you must repay the portion of the property taxes that cover the months after you move in. 

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 insurance

Property insurance (or homeowners insurance) must be in place on closing day. Basically, property insurance premiums covers the cost of replacing your home and its contents in the case of fires, floods and any other number of hazards. You usually pay in the form of monthly or annual premiums. The cost of insurance will vary depending on your home and location. For example, a home in a flood zone would require flood insurance.

Home renovations

There may be necessary repairs or changes you must make to your new home, but it’s wise to put off major work for a year or so – until you’ve actually lived in the space and you have a sense of what’s working for you and what’s not. 

Interest rates

While not technically a fee, the interest rate that you pay will determine your monthly carrying costs. Be sure to discuss variable and fixed rate mortgages with your mortgage broker. Which one you decide on can impact your budget.