Congratulations on taking the exciting step of buying a house in Canada!
While the process of finding and buying your dream home can be thrilling, it’s important to be aware of the various costs that come along with it.
We’re not just talking about the purchase price of the home.
Closing costs are an essential part of the home buying process in Canada.
These are the fees and expenses you’ll need to pay in addition to the purchase price of the home to finalize the sale.
It may seem overwhelming to think about adding more costs on top of the biggest purchase of your life.
However, understanding what these costs are and how they’re calculated can help you budget accordingly and avoid any surprises along the way.
In this article, we’ll take a closer look at the different types of closing costs you may encounter when purchasing a home in Canada, including legal fees, land transfer taxes, and home inspections.
We’ll also discuss the average closing costs in Canada and who is responsible for paying them.
By the end of this article, you’ll better understand what to expect regarding closing costs and how to prepare for them.
Let’s get started!
Who Pays for Closing Costs in a House Purchase?
When it comes to closing costs, the question of who pays for them can be a bit complicated.
Generally, both the buyer and the seller will have some closing costs to cover.
However, the specific costs and who pays for them can vary depending on the terms of the sale.
- Buyer’s Closing Costs: As the buyer, you can expect to pay the majority of the closing costs associated with your house purchase. This includes legal fees, home inspection costs, and title insurance. You’ll also be responsible for paying the land transfer tax. Depending on the home’s purchase price and the province or territory you’re buying in, it can be a significant expense.
- Seller’s Closing Costs: The seller will also have some closing costs, such as real estate commission fees and legal fees related to the sale. However, these costs are typically lower than the buyer’s closing costs.
- Negotiating Closing Costs: While the buyer is typically responsible for paying most of the closing costs, it is possible to negotiate these costs as part of the sale. For example, you can negotiate with the seller to cover some closing costs or reduce the home’s purchase price to account for these expenses.
Types of Closing Costs for House Purchases in Canada
Legal Fees are an important part of the closing costs associated with purchasing a home in Canada.
When buying a home, you need a lawyer to review the purchase agreement, conduct a title search, and register the title transfer.
These fees can range anywhere from a few hundred to a few thousand dollars, depending on the specifics of your transaction.
The legal fees you’ll need to pay can vary depending on the complexity of the transaction and the lawyer you choose to work with.
For example, if you’re buying a brand new home from a builder, the legal fees may be lower since the builder will have already taken care of many of the legal aspects of the transaction.
On the other hand, if you’re buying an older home with multiple owners or complex title issues, you can expect to pay more legal fees to ensure everything is in order.
It’s important to choose a lawyer who specializes in real estate transactions to ensure that all of the necessary steps are taken to protect your interests.
You can ask your real estate agent for recommendations or do your research to find a reputable real estate lawyer in your area.
While legal fees may seem like an added expense, it’s important to remember that having a lawyer on your side can help protect you from potential issues that could arise during the home buying process.
By ensuring everything is in order from a legal standpoint, you can have peace of mind knowing your investment is secure.
Title insurance is another important aspect of closing costs when purchasing a home in Canada.
It protects you against any unforeseen issues with the title of the property you’re buying.
Title issues include title fraud, unknown liens, and encroachments on your property.
While these issues may not be immediately apparent when buying a house, they can cause significant financial and legal problems down the line.
Title insurance provides coverage that will cover the cost of defending your title in court, paying off any outstanding liens, or compensating you for any loss in property value due to the encroachment.
The cost of title insurance will vary depending on the purchase price of the home and the specific policy you choose, but it is typically a one-time expense paid for at the time of closing.
A professional home inspection is essential to the closing costs associated with buying a home in Canada.
Before finalizing your purchase, it’s important to have a professional home inspector check the property for any issues that could potentially cost you in the long run.
A home inspection is intended to provide you with a comprehensive understanding of the property’s condition you are purchasing.
It aims to identify any potential problems that should be resolved before finalizing the deal.
It can uncover potential issues, including structural damage, electrical or plumbing problems, or pest infestations.
While some of these issues may be minor and easy to fix, others can be significant and costly.
By having a professional home inspector check the property, you can better understand what you’re getting into and avoid any surprises down the line.
Land Transfer Tax
Depending on where you buy your house, you may be required to pay a land transfer tax on the purchase transaction at the time of closing.
The land transfer tax is calculated as a percentage of the property’s purchase price.
This percentage can vary depending on the province or territory you’re buying in, as well as the specific purchase price of the home.
For example, in Ontario, the land transfer tax rates range from 0.5% to 2.5% of the purchase price, depending on the price of the home.
Mortgage Default Insurance
When you purchase a home with less than a 20% down payment, mortgage default insurance is mandatory to protect the lender if you default on your loan.
This insurance not only provides financial protection to the lender but also helps you as a borrower to qualify for a mortgage with a lower down payment.
The cost of mortgage default insurance depends on the size of your down payment and the home’s purchase price.
Typically, this cost is added to your mortgage payments and paid off over the life of the loan.
Before approving or funding your mortgage, your lender may ask for an appraisal of the property to verify its market value.
This appraisal is conducted by a licensed appraiser who inspects the property and compares it to similar properties in the area to ensure that it is worth the amount of your mortgage loan.
The goal of this process is to assure the lender that the property is valuable enough to serve as collateral for the loan.
The cost of an appraisal is determined by the size and location of the property and usually ranges from $400 to $1,000 or more.
Despite the expense, an appraisal is a crucial investment in your home purchase. It confirms that you are paying a fair price for your property and protects the lender from lending you more than it is worth.
An appraisal can benefit you in the long run by potentially increasing your home equity and resale value by accurately assessing the property’s value.
If you are getting a mortgage, you will need to purchase home insurance to protect your investment in case of damage or loss due to things like fire, theft, or natural disasters.
Home insurance covers your home’s structure and any personal property inside.
It can also cover liability if someone is injured on your property.
How much you pay will depend on the location and value of your home and the specific coverage you choose.
It’s important to shop around and compare quotes from different insurance companies to ensure you get the best coverage at the best price.
Additionally, some lenders may require you to have a certain level of coverage to qualify for a mortgage, so be sure to check with your lender about their specific requirements.
When buying a home in Canada, don’t forget to budget for the cost of moving into your new home.
Although it’s not a required cost to close on your mortgage, it’s a crucial part of the overall cost of home buying.
The expenses associated with moving can include hiring movers, renting a truck, or buying packing supplies.
These costs can vary based on the distance of your move, the amount of stuff you have, and the level of service you require.
If you’re planning to hire professional movers, make sure to obtain quotes from multiple companies and compare their prices and services.
Some moving companies charge by the hour, while others may charge a flat rate based on the size of your home or the distance of your move.
Additionally, consider purchasing moving insurance to protect your belongings during the move.
There are still expenses even if you plan to move without professional help.
Renting a moving truck, purchasing packing supplies, and taking time off work to pack and move can all add up.
Budgeting for these expenses in advance is essential, ensuring you have enough money to cover them.
Other Closing Costs
Other costs you may encounter include bank fees, courier fees, or adjustments for prepaid taxes or utilities.
Bank fees are fees charged by your lender for things like processing your mortgage application, appraisals, or legal work.
These fees can vary depending on your lender and the specific mortgage product you’re using.
Be sure to ask your lender about any fees associated with your mortgage and factor them into your overall closing costs.
Courier fees are fees for transporting documents or packages related to your home purchase.
These fees can be charged by your lender, lawyer, or other professionals involved in the home buying process.
While they may seem small, they can add up quickly, so be sure to ask about any courier fees in advance.
Finally, adjustments for prepaid taxes or utilities may be required at closing.
This could include property taxes, water bills, or utility bills that were paid in advance by the seller.
You will need to reimburse the seller for any prepaid amounts that cover a period after the closing date.
By planning ahead and budgeting for these costs, you can ensure that your home purchase is a smart financial decision without any unexpected surprises.
Average Closing Costs in Canada
Now that you know what types of closing costs you may encounter, you may be wondering how much you can expect to pay in total.
The truth is that closing costs will vary widely depending on the home’s purchase price, the province or territory you’re buying in, and the specific services you require.
The average closing costs for a $500,000 home in Canada range from 1.5% to 4% of the purchase price, or $7,500 to $20,000.
This may seem like a lot of money, but it’s important to remember that closing costs are necessary for your house purchase to close in time.
Regional differences can also play a significant role in the total amount of closing costs you’ll pay.
For example, if you’re buying a home in Ontario, you can expect to pay a land transfer tax of up to 2.5% of the purchase price, while in Alberta, there is no land transfer tax at all.
Also, if you’re buying a brand-new house, you may need to pay additional fees for utility hook-ups or development levies.
On the other hand, if you’re buying an older home, you may need to pay for additional inspections or repairs.
You can use online calculators or speak to your real estate agent or lender to estimate your closing costs. However, keep in mind that these estimates are just that – estimates.
Your actual closing costs may be higher or lower depending on the specifics of your transaction.
Congratulations on making it to the end of this article!
By now, you should have a better understanding of what closing costs are and how they can impact your home purchase in Canada.
While closing costs may seem daunting, it’s important to remember that they are necessary when buying a home.
One of the most important things you can do when preparing for your home purchase is to budget for the closing costs.
By understanding the types of costs you may encounter and doing your research ahead of time, you can avoid any surprises and ensure you have enough money to cover these expenses.
It’s also important to keep in mind that there are ways to reduce the financial burden of closing costs.
For example, you can negotiate with the seller to cover some of the expenses, choose a mortgage with lower closing costs, or work with your real estate agent to find ways to reduce the overall costs of the transaction.
In conclusion, while closing costs may not be the most exciting part of the home buying process, they are essential to ensuring a successful and secure purchase.
By understanding what to expect and planning ahead, you can confidently move forward with your home purchase and start enjoying the many benefits of being a homeowner in Canada.
Best of luck in your home buying journey!