When you purchase a home or other parcel of real estate, whether you are taking out a mortgage or paying for the property in cash, there are a number of costs associated with completing the transaction. These are called “closing costs” and may be due to the lender, the buyer, the seller, a third party or the government. Real estate transactions are generally complex in nature, and the various elements of the transaction lead to the incurring of a number of different costs.
The Canadian Mortgage and Housing Corporation (CMHC) suggests that you estimate your potential closing costs for between 1.5 and 2.5% of your purchase price, in addition to the down payment. So if you’re buying a $500,000 property, that means that (to avoid PMI) you would need to have a $100,000 down payment. Closing costs would range between $7,500 and $12,500, depending on your transaction.
Types of Closing Costs
Let’s take a look at some of the various kinds of closing costs that you are likely to encounter when purchasing a property. Every province is a little different when it comes to regulating transactions, so you’ll want to talk to your realtor or your title company to make sure which fees are applicable to your situation.
Land Transfer Tax
Provinces keep a register of all of the owners of the property parcels within the provincial boundaries. When you buy a property, you transfer that property into your name, and the province charges a tax to register that change. In some provinces, this tax goes up on a progressive scale with an increase in the value of the home, but it frequently ranges between 0.5% and 2% of the home’s purchase price.
The lender orders an appraisal to find a professional perspective on the market value of the property, and for new homes this is generally a requirement. The fee for this can vary between $100 and $300. There are some home builders who will pay the fee up front but then pass it along to you in the purchase price. Appraisals are more likely to be requirements when you have enough of a down payment to avoid mortgage insurance.
Mortgage Insurance Fee
Known as PMI (private mortgage insurance), this fee becomes applicable if you do not make at least a 20% down payment on your property purchase. The purpose of this insurance is to protect the lender in case you happen to default on the note. You pay the premiums as a part of each mortgage payment, but the beneficiary is the lender, not you. Some of the mortgage insurance companies in Canada are Canada Guarantee, Genworth Financial and CMHC.
Mortgage Application Fee
This is another fee that tends only to apply to those who do not have 20% to put down on the house, but not all banks or lenders charge it. In most cases, this application fee is a few hundred dollars, but this is an area in which lenders vary, which is why it is a sound idea to shop your loan around.
Most reputable realtors tell their clients to get a home inspection and indicate that any offer on the property is subject to the findings of that inspection. This can be a real lifesaver, as inspectors can find such issues as electrical problems, HVAC issues, pest infestations, structural concerns or mold and mildew. This can run between $300 and $500, but it is worth it if it finds a problem that would have cost you much, much more after closing.
Land Survey Fees
When you purchase a property, you hire a surveyor to look at the property to make sure that the current owners are following the boundary lines. The surveyor looks at the legal description of the property and then uses specialized instruments to measure it and mark the lines. Lenders often require a new survey if the existing one has been around for several years. This is a fee that the seller will often pay.
A title insurance policy involves running a check of the title history of the property that you are about to purchase. Sometimes previous owners can amass liens for unpaid taxes or judgments, as well as other debts. Many lenders require that you buy title insurance to make sure that the property’s title is clear before they will issue a mortgage. This protects both the buyer and the lender in the case that the title comes back in any other status besides clear.
If you hire a lawyer to go over your closing documents, plan to pay a fee for that. Those fees will vary, depending on what you ask the lawyer to do.
Utility costs and property taxes are sometimes prorated to the closing date, depending on whether they have already been paid up to the closing date or not.
This is a list of the most common closing costs in real estate transactions. Your transaction may not involve all of these, but it could also involve other ones. Ask your realtor to help you calculate your closing costs well before you go to settlement so you can have those funds set aside.