It’s no secret that buying a house is likely the largest purchase a person will ever make. Most buyers do more mental and scribbled math during the process of figuring out how much house they can afford than they ever have or will again.
The problem is that sometimes, there are real costs that get left off the budget sheet, and closing day becomes a mad panic to come up with the extra cash.
Don’t feel that you have to just know everything – ask questions! By the time you are ready to buy, you should have a realtor and a mortgage professional working for you. Soon after that, your lawyer will join your support team. Make sure you ask questions if you are unsure – and ask again if you forget. The more informed you are, the smoother the process will be.
Every transaction is unique, but we have compiled a list of the most common “extras” that comprise the estimated 1.5-4% additional cost you can expect on closing.
Here is a list of expenses that must be considered as you purchase a house:
DEPOSIT: The first payment toward your purchase will be in the form of a deposit that will be held in trust. The amount of your deposit is negotiated during the offer process. You must have this money available at the point of obtaining an accepted offer. You will be credited this amount toward your downpayment on the day of closing.
DOWNPAYMENT: First time buyers and others who are not selling a property at the same time will need to make sure to get the funds to their lawyer on closing day. The amount of the cheque or transfer, when added to the deposit, will have to add up to at least 5% for a high ratio mortgage, or 20% for a conventional loan. If you have a larger downpayment, it will represent the difference between the purchase price and the loan amount for which you have been approved.
LAND TRANSFER TAX: This is calculated based on a formula created by the provincial government. If you are a first-time buyer, you may qualify for a rebate on this tax. Your mortgage broker can tell you exactly how much to expect to pay, but here is a calculator you can use to estimate this tax. Remember that some municipalities (like Toronto) also have their own Land Transfer Tax that is charged on top of this.
LEGAL FEES AND DISBURSEMENTS: Your lawyer will have a billing structure that includes a fee for the transaction, plus disbursements. You may pay $500 for the actual legal work, title search charges of $150-200, registration charges for your mortgage and deed of $75-150, plus expenses related to copies, postage, status and/or tax certificates, title insurance, execution certificates, and any other application fees that the legal team has to pay up front. Get a quote from your chosen lawyer that estimates potential disbursements for the type of property you are considering.
TITLE INSURANCE: Some lenders require that you purchase this to protect against losses related to title or ownership. To learn more about this insurance, read this excellent article. You can expect to spend $300-400 on an average policy, but do speak to your lawyer about this expense.
PST ON CMHC INSURANCE: This is probably the most unexpected line on the billing statement for most new buyers. You already know that CMHC insures high ratio mortgages (transactions done with a downpayment smaller than 20%). CMHC protects lenders in case a mortgagor defaults on payments. The premiums for the CMHC insurance portion of your payment are built into your monthly mortgage amount. However, the PST on the total insurance amount is due and payable on closing day. Ask your mortgage provider to tell you ahead of time how much this will cost.
*APPRAISAL FEE: Sometimes, your lender will foot the bill for the appraisal on your property, but not always. Make sure you clarify who pays for it when you apply for financing.
*HOME INSPECTION: This is not mandatory, but it is highly recommended. Some transactions are done under high pressure circumstances, such as multiple offers. Buyers have been known to forgo their home inspections in order to win bidding wars. Unless you are qualified to assess the condition of the home yourself, please consider a home inspector to be money well-spent for long term peace of mind. It may be possible to have the inspection done prior to placing an offer in some cases. (Expect to spend $350-500 + taxes.)
TAX ADJUSTMENT: You may have to reimburse the seller for a portion of the property taxes. There will be an adjustment to reflect that you are responsible for a pro-rated share of the taxes starting on the day of closing. If the seller has pre-paid the taxes for the year, your lawyer will refund the overpayment in the accounting process.
MOVING EXPENSES: Whether you are buying pizza and beer for friends and using a rented trailer or hiring a full-service moving company, there will certainly be moving costs. Boxes, bubble wrap, packing tape, even disposal fees if you have to do a major declutter, should be assigned a dollar value and added to the budget.
It can feel overwhelming to have to keep track of everything you need to know, especially as a first-time buyer. We are here to help take some of the stress off your shoulders, and we are always happy to refer the right professionals along the way. If you have any questions about how to budget for your closing costs, don’t hesitate to contact us. We look forward to helping you with a smooth transaction!
Would you like a free consultation? It only takes one hour and we’ll run you through the process and work out your exact closing costs. This is the best way to be fully prepared for your home purchase. Simply fill out the form below and we’ll be in touch.