Closing costs: What are they and how much will you pay?

Closing cost

Closing costs include various costs and fees associated with taking out your mortgage loan, including legal and administrative fees that you will have to pay before or after the closing date of the purchase of your property. It’s important to budget for these costs because, in most cases, you won’t be able to include them in your mortgage payments.

Key Takeaways

  • Closing costs are usually 3-5% of the price of the property, but it’s always wise to err on the side of caution and have more money than you need.
  • Land transfer tax is one of the highest closing costs. The amount you pay is based on the purchase price of your property and usually only applies to resold properties.
  • You may not have to pay all of the closing costs listed in this article, especially if you are buying a first home, as discounts are available.

How much are the closing costs?

Closing costs vary depending on the property you are considering buying, but you should err on the side of caution and set aside 5% of the purchase price to cover such costs. Closing costs are usually 3-5% of the price of the property, but it’s always wise to have more money than you need. Any surplus can be used to furnish, decorate or maintain your new property. It never hurts to be thrifty and foresighted!

Land transfer tax (provincial and municipal, if applicable)

This is one of the highest costs associated with closing the purchase of your property. Land transfer tax is a one-time payment made by the buyer when the property is transferred from the seller. The amount you pay is based on the purchase price of your property and usually only applies to resold properties. If you live in Toronto, for example, you will have to pay both Toronto and Ontario land transfer taxes. However, if you are buying the first property, you may be eligible for a property transfer tax refund. We’ll give you all the details on how to submit a claim.

HST/GST

Taxes only apply to new construction. However, under certain circumstances, you may be eligible for a refund (federal and provincial). Certain conditions may apply. Contact your lawyer or notary for more information on this subject.

Assessment fees

An appraisal is an unbiased estimate of the value of your property required by the lender. The appraisal certifies the resale value of the property to the lender in the event of default on your mortgage and usually costs $300 to $500.

Legal fees and disbursements

Your lawyer or notary will charge you a fee for setting up the mortgage and transferring the title. The amount of the fee will depend on who you are retaining but is usually $800 to $1,000.

Location Certificate

If you are buying a single-family property, you will need to provide your lender with a certificate of location that specifies the location and boundaries of the property. However, there may be some exceptions for low loan to value loans and rural properties. A certificate of location costs approximately $750 to $1,000, but the lender will often accept a copy of a current certificate.

Interest adjustment

You will have to pay interest on any difference between the closing date of the purchase and the date of the first mortgage payment. You can avoid an interest adjustment by scheduling your first mortgage payment exactly one payment period after the closing date.

Statement of Adjustments

Your lawyer or notary will calculate the adjustments and prepare a statement for your portion of utilities, property taxes, and other bills based on the closing date in the month or payment cycle. As some landlords pay for these services in advance, the adjustment could be very high.

Title insurance

Most lenders require title insurance to protect against loss in the event of a property dispute. This type of insurance is purchased through your lawyer or notary and costs approximately $200 to $300.

Property Inspection

A property inspection is a wise investment, as a professional will conduct an objective visual examination of the property’s physical structure and systems. An inspection costs $350 to $500.

Tip: You can avoid an interest adjustment by scheduling your first mortgage payment exactly one payment period after the closing date.

How to avoid certain closing costs

You may not have to pay all of the aforementioned closing costs, especially if you are buying the first property. We’ll give you a full list of all costs as soon as your mortgage is approved and offer you available discounts to help you save as much money as possible.

HST and GST only apply to new construction, so if you’re buying an existing property, you won’t have to worry about this expense.

In certain circumstances, depending on the property, you will not have to pay for a certificate of location if the lender accepts the current certificate.

You can avoid an interest adjustment by scheduling your first mortgage payment exactly one payment period after the closing date of the sale.

Do sellers pay closing costs?

The main closing costs paid by sellers are real estate commissions, which are usually split between the buyer’s agent and the seller’s agent.

In some cases, a seller will pay for a pre-inspection by a home inspector to reassure buyers and convince them that buying the property is a good investment.

Mortgage insurance costs

Many people find it difficult to save for a down payment. Although it is recommended to make the largest possible down payment in order to reduce the mortgage amount, in Canada the minimum requirement is 5% for the first $500,000 and 10% for the remaining amount. If your down payment is less than 20%, you will need to purchase mortgage loan insurance, which will protect your mortgage lender if you are unable to make your payments.

Mortgage default insurance is payable at closing or can be included in monthly mortgage payments. In the second case, you’ll have to pay interest, so we’ll make sure you understand what each option entails.

By aamritri

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