All you need to know about one of the final stages of the buying process
Becoming a homeowner is one of the biggest decisions—and expenses—you can make in your life. Before the house keys change hands between seller and buyer, however, there is one last thing you need to do—pay closing costs. And they are often not insignificant.
While the closing costs in Canada are paid for by both the home buyer and the seller, most of these payments come from the buyer to numerous entities. It is therefore important, for the buyer, to know what you are getting yourself into. But remember: the seller isn’t off the hook, either.
Who pays for what? What is the seller’s responsibility? What is the buyer on the hook for?
Here is everything you need to know about closing costs, what they are, the common closing costs for buyers, and the responsibilities of the sellers. For the mortgage professionals who frequently visit our site, this can be the perfect article to share with a client in Canada who has questions about closing costs.
Closing costs are extra fees that you, the home buyer, must pay at the end of the home-buying process. Closing costs, such as legal fees, and other one-time expenses associated with the purchase of a property can add up. Therefore, it is important that you factor these costs into your budget.
The term closing cost refers to the transaction that takes place when the property title is officially transferred from the home seller to the home buyer. During this closing period, the taxes and fees that came from the purchase are assessed. In other words, the closing cost pays for everything that went into the real estate transaction, above and beyond the purchase price.
Closing costs: An estimate
It is common for many first-time home buyers to underestimate the amount they will need to pay toward closing costs. Most Canadians will have to budget between 3% and 4% of the purchase price of a resale property to pay for the closing costs. This means, for instance, that a home that costs $200,000 will require closing costs of anywhere from $6,000 up to $8,000—which is not insignificant, especially after the amounts you have spent to reach that point.
Keep in mind, however, that these are estimates. The amount you will have to pay could be higher (or lower), depending on various external factors such as where you live, the type of property you are purchasing, or if whether it’s a newly built construction.
The amount of money you will have to pay in closing costs varies. While external factors play a role in your closing costs, the fees and costs each home buyer must pay also varies. However, there are more common closing costs that most Canadians pay:
- Property evaluation fee
- Land survey fee (or certificate of location cost)
- Title insurance
- Legal costs
- Municipal and provincial tax
- Fire/property insurance
- Pre-paid property taxes, utility bills, and other charges
- Home inspection fee
- Water quality inspection fee
- Mortgage default insurance
- Estoppel certificate fee
- Moving expenses
- Extra post-move costs
- Mortgage payment protection (optional)
Let’s take a closer look at each to give you a better idea of what they are and how they add up.
1. Property evaluation fee
A property evaluation fee pays for a recognized home appraiser to confirm the market value of the home. The lender might require the home appraisal to determine if the selling price is reasonable for the market. Depending on the location of the home, the estimated cost could be up to $300 and is paid to the lender to arrange the appraisal.
2. Land survey fee (or certificate of location cost)
Prior to finalizing the home loan, you might have to pay for an up-to-date survey or certificate of location if the seller fails to produce one. In lieu of a survey, title insurance might be accepted. Depending on the type and size of the property, the estimated cost for a land survey fee could be as high as $2,000.
3. Title insurance
Estimated at around $400, title insurance protects the home buyer against loss caused by defects of title to the home.
4. Legal costs
Legal costs can include service provided by your lawyer, such as preparing the mortgage, conducting a title search, and drafting the title deed. The estimated cost for legals fees is about $500, plus GST/HST, which you pay to your lawyer upon closing.
5. Municipal and provincial tax
You may know municipal and provincial tax, in this context, by these names:
- Land Transfer tax
- Land registration fees
- Property transfer tax
- Deed registration fee
Calculated differently by municipality and province, this tax is based on the buying price of the home and generally applies to resale homes only. Some provinces may, however, charge tax on new constructions.
6. Fire/property insurance
To budget accurately, it is important to ask your notary or lawyer for the most recent fire/property insurance costs for your region. You must insure your home against fire or significant damage for, minimum, replacement costs—and the policy must be in effect on closing day. You should also get coverage for your furniture, electronics, jewelry, clothing, and other contents in your home.
7. Pre-paid property taxes, utility bills, and other charges
These are the utility costs and tax that the seller has pre-paid that must be reimbursed by the home buyer. They are also known as adjustments. The amount owing is calculated by the lawyer and can cost up to $2,000.
8. Home inspection fee
The best approach is to make your offer conditional depending on a good home inspection. Home inspection fees typically depend on the size and type of the property. For most standard suburban or urban homes, you may want to budget for roughly $500, which is paid directly to the inspector that you hire.
Photo via Mark Moz.
9. Water quality inspection fee
If, for instance, the property gets its drinking water from a well you will have to have the quality of the water tested to make sure it is healthy for human consumption. For the water quality inspection fee, you can often negotiate the cost with the vendor, listing them in the offer to purchase.
10. Mortgage default insurance
If you make a down payment of less than 20% of the purchase price of the property (which is known as a high-ratio mortgage) you will have to pay mortgage default insurance, also sometimes called private mortgage insurance. While this amount is typically added to your mortgage, you can also pay it in full on closing. The estimated cost for mortgage default insurance can be as high as 6.5% of the loan amount or as low as 0.6%. to qualify for mortgage default insurance, you have minimum 1.5% of the buying price for the closing costs above your down payment.
11. Estoppel certificate fee
You will pay an estoppel certificate fee if you are purchasing a condo or a strata unit, except in Quebec. This certificate accompanies the financial statements of the condo corporation and outlines the fees for your unit and the status of the seller’s payments and reserve fund, among others.
To proceed with the closing transaction of the purchase, your lawyer or notary will require this certificate. The estimated cost of the Estoppel certificate fee is up to $100.
You must pay GST and HST on the buying price of a newly built property and it may also be in effect for a house that has been refurbished significantly. It is important to keep in mind that the rebate might already be included in the builder’s selling price.
13. Moving expenses
If you move yourself, you can save on the expense. However, you might need to hire professional movers if you have a lot of heavy items or if you need to move quickly. Local movers give you an estimate based on the location of your new property and the size of your current one. The estimated cost for professional movers can be up to $2,000.
14. Extra post-move costs
By post-move costs, we mean miscellaneous expenses like redirecting mail, utility hook up, tools, painting, new appliances, decorating and cleaning supplies, and window treatments, among others. Naturally, these post-move costs can vary widely. However, it is a good idea to budget for between $1,000 and $2,000 for the basics alone.
15. Mortgage payment protection (optional)
While optional, mortgage payment protection can provide you with insurance coverage to help you meet your financial responsibilities on your home loan. This will also protect your family, assets, and lifestyle if you die, become critically ill or disabled, or lose your job involuntarily.
Yes. The major closing costs that sellers in Canada pay include:
- Legal fees
- Real estate commissions
- Sales tax on real estate commissions.
Let’s take a closer look at the closing costs that sellers typically pay in Canada.
1: Legal fees
While the cost you pay may vary, real estate lawyers usually range between $500 to $1,000. The services your lawyer may provide include the following:
Title search. As the seller, your lawyer will ensure that you close any outstanding permits and agree to pay outstanding items from the proceeds of the sale of the property. If the buyer’s title search reveals any easements or restrictions, your lawyer will provide solutions to satisfy the buyer.
Letter of direction. Your lawyer will also verify any mortgages and lines of credit on the home, providing the buyer’s lawyer with a letter of direction stating that any proceeds from the home sale will be used to repay debts and taxes owing. Your lawyer will also verify property tax info and give it to the buyer’s lawyer.
Statement of adjustments. This is a list of your expenses owing or prepaid at the time of closing, including condo fees, property taxes, parking permits, etc. For instance, if you have paid for a parking permit for a year and have sold the home half-way through that period, the buyer will be responsible for the second half of the year.
Closing date. The buyer's lawyer electronically transfers your lawyer funds on closing date. Your lawyer confirms and uses the funds to pay outstanding debts and mortgages. Afterward, your lawyer will prepare a report and give the keys to the buyer’s lawyer. At this point, your lawyer will also deduct closing costs, like real estate commissions and lawyer fees, and credit you with the remaining balance. You can usually expect this money withing 24 hours of closing.
2: Real estate commissions
These are fees that you pay to your real estate agent for their services, such as marketing, staging and, ultimately, selling your property. Generally, the seller pays the commission for both the buyer’s and the seller’s agents in Canada. After the transaction is completed, the real estate commissions are paid to a lawyer who then pays to both the buyer and seller agents.
As the seller, you have the choice to self-list your property to avoid the costs of commission. However, it is better to have previous experience with real estate transactions before opting for this route.
In Ontario, the combined real estate commission often ranges from 3.5% to 5% of the buying price. The buyer’s agent’s commission is typically fixed at 2.5% and the remaining 1% to 2.5% is for the seller’s agent.
3: Tax on real estate commissions
Yes, there is tax on real estate commissions. In each case, the real estate commissions are subject to the sales taxes at the sales tax rate for every province. Here is how the tax on real estate commissions breaks down for four provinces:
The closing costs are essentially the final transaction before the seller hands over the keys to the buyer. While the price of the costs varies widely, they are usually significant enough that you should budget for them beforehand. And remember: the seller isn’t off the hook either.
Before committing yourself to getting your mortgage, do your research, such as checking in on what the best mortgage lenders in your area can do for you.
Have experience with closing costs? Let us know in the comment section below.