You have come to the decision to buy a house and have started your research and have started saving for the “out of pocket costs” for buying a home. This of course includes your down payment, but it also includes funds for repairs and closing costs.
What are closing costs?
Closing costs are the legal and administrative costs included with, well, “closing” on the property sale. In Canada this includes the Land Transfer Tax (LTT), title Insurance, legal fees, and disbursements. This will include official documentation and the creation of such documents. If you don’t have 20 per cent or more for your down payment, you’ll be paying the PST (Provincial Sales Tax) on your mortgage default insurance. Any house-related expenses the seller paid for (such as utilities) before closing the sale that you will be using may also be included in the closing costs.
There is a lot that goes into the buying and selling of property beyond just the sale price. There are applicable taxes and paperwork involved. You are also paying for the time of lawyers, notaries and other real estate professionals as well as inspectors and appraisers.
Let’s break down the elements of closing costs:
The easiest place to start is by reviewing the individual items that might come up and lead to costs when closing on your new home.
Land Transfer Tax
You will pay a percentage of the price of your home based on which province you live in. The amount will differ from province to province, and certain cities or townships (Such as Toronto) may also have their own LTTs as well. What this tax does is register the land title in your name.
Property taxes
Property taxes, like LTT, are a percentage of your home’s price depending on your municipality and province. Halifax, for instance, charges 1.25 per cent per $100,000. Therefore, property taxes on a $500,000 home would be $6,250. A house valued at the same price in Barrie would have annual property taxes of $5,000 representing a one per cent property tax annually.
On the topic of property taxes, there are also adjustment costs, which are incurred when a seller pays property taxes past the closing date. In the event that happens, the seller would receive a credit and you would need to pay the difference.
Legal fees:
Earlier in this post we talked about the cost of professionals’ time. Owning a home requires documentation, such as the title, insurances, and other such documentation to protect you from legal and financial problems in the future. Depending on the province you live in these costs can range from $500 to over $1,000.
Fuel/utility adjustments:
Any utilities the seller paid before the closing date may be reimbursed in the form of adjustment fees, operating much like property tax adjustments. These costs are sometimes negotiated with the seller.
Insurances:
When you buy a home the majority of lenders will require that you buy title Insurance. Title insurance, like most insurances, will protect you from losses should the worse arise. This will be done through a lawyer or legal notary and is included in the closing costs and, once again, depending on the province you live in, title insurance will run you about $100-$300.
Maintenance:
If your property has a septic tank or well, you will have to have them tested to ensure they are in working order. Water tests will be done for your safety and the safety of your family. These costs are often negotiated with the seller.
Unexpected closing costs:
As with any big financial commitment, it is best if you do what you can to prepare for any eventuality. Here is a brief list of unexpected costs that could come up:
- Certificate of location
- Estoppel certificates for condos (Excluding Quebec)
- Home appraisal
- Home inspection & necessary repairs
- Municipal levies
Independently, these may not seem like much, but when put together can possibly set you back thousands of dollars. It is best to plan ahead in the event that anything unforeseen or neglected during closing comes up.
So how much can I expect to spend?
Once we have taken into account the legal fees, the applicable taxes, adjustments, insurance and any inspections or work that have to be done you will be looking at 1.5 to 2.5 per cent of the price of your home. If we return to our hypothetical $500,000 home, you would be looking at between $7500 to $10,000 in closing costs.
If you are interested in buying a home, it is important to prepare for these costs. You are not just paying the settled price for your home. You will also be paying for everything involved in the legal process of buying a home. By doing your research and taking these factors into account, you will not be sidelined by the closing costs. An unbiased mortgage broker will be sure to make you aware of these costs and help you plan in advance.
If you are a homeowner looking for options, or planning on buying a home in the future and want some help planning, give me a call at (705) 333-4338 or get in touch with me here!