It’s no surprise that buying a home is a major financial responsibility. Aside from your down payment, this investment comes with a handful of expenses – like closing costs – that can considerably impact your overall home affordability. Often overlooked, closing costs are a series of fees applied on top of a home’s purchase price and are important to keep in mind when budgeting and house shopping. Taking the time to understand the closing costs that come with your home purchase will ensure you’re financially prepared to make this investment.
What are closing costs?
Closing costs are additional expenses that typically account for 1.5% to 4% of a home’s purchase price. For example, if you’re buying a home worth $520,000, you could pay anywhere between $7,800 to $20,800 in closing costs. Generally, closing costs are paid when the property title is officially transferred from the seller to the buyer; however there are some cases when these costs are incurred before the closing date.
What do closing costs include?
It’s important to remember that closing costs will vary based on the province or city that you’re buying in. They may also change depending on the type of property you purchase. For example, a condo or new construction home will have different closing fees than a resale home.
Home Inspection: This fee is for formal inspection to ensure everything in the home is in good order, functional and safe before moving in. On average, a home inspection is between $300 and $500.
Home Insurance: This protects you in case of fire and other natural disasters, and must be in place before your lender advances your mortgage. For example, on a $400,000 home, home insurance could amount to approximately $60 per month.
Appraisal Fees: When you apply for a mortgage, your lender may order an appraisal to get an estimate of the property's value. This cost will depend on the property’s value, location and size and can typically range from $250 to $350.
Land Transfer Tax: This provincial tax is applied when you buy a home and is calculated based on its purchase price – typically 0.5% to 2.5%. Land Transfer Taxes vary depending on the city or province you buy in. If you’re a first-time buyer, you may be eligible for a land-transfer tax rebate.
For example, if you purchased a $450,000 condo specifically in Toronto, you would be charged a provincial land transfer tax of $5,475 and a municipal land transfer tax of $5,475. If you’re a first-time home buyer, you could also be eligible for a rebate of $8,475, totalling your tax to $2,475.
Lawyer Fees: These fees account for the preparation and recording of official documents by a real estate lawyer. Lawyer fees can range from from $1,200 to as high as $2,000.
Title Insurance: A title insurance policy is required to protect you and your lender from title fraud, municipal work orders, zoning violations and other property defects. This will be purchased by your Real Estate Lawyer and can usually cost around $250, but are generally included in your lawyer fees.
Closing Adjustments: These costs refer to a variety of cost changes that may take place before closing and will differ based on the type of property you’re purchasing. For example, if you’re buying a new construction home, adjustments could be the cost of driveway paving or the rental of a hot water tank, which may have not been included in your original purchase and sale agreement.
Interest Adjustments: This cost is the amount of interest payable from your closing date the date of your first mortgage payment. For example, if your closing date is September 30 and your first mortgage payment is on October 15, you will be required to pay interest for that 15-day period.
Property Taxes: These taxes are calculated based on a percentage of your home’s value. It varies based on the city you live in and needs to be paid annually. If you’re buying a resale home, you may have to repay the previous homeowner at closing if they paid the property taxes in full for the year.
GST or HST: New construction and substantially renovated homes may be subject to GST or HST. If you are required to pay GST and HST, you may qualify for a new housing rebate.
At Homewise, we offer a variety of resources to help our clients as they navigate the home buying process. Take advantage of our closing cost calculator to find out how much you might owe in closing costs. This will help you proactively budget and ensure you’re financially prepared to make a home purchase.