No matter how many times I talk about closing costs on my blog and to my clients, buyers are still shocked the day they have to bring in their cheques to the lawyer’s office before the closing date. How much should closing costs be, how are closing costs calculated, what is included in closing costs, who pays the closing costs? These are some typical questions that all buyers want to know, that’s why I’m so happy that there’s a new website out there, the new kid town, which is solely dedicated to closing costs, yay!!! MyClosingCosts.ca is here to set the record straight, so you don’t forget your closing costs!
Have you ever been out shopping and suddenly noticed a beautiful table or one-of-a-kind rug that you didn’t expect to find? You rush up to the register to purchase it. The sticker price says $200, but after taxes you end up paying $226 – that’s $26 extra out of your pocket.
Closing costs work the same way – they’re out-of-pocket expenses not shown on the sale price of your home. If you’re a first-time homebuyer on a tight budget, it’s crucial to budget for closing costs ahead of time, so you know what your total purchase price will be and so you’re not left scrambling to come up with the extra cash on closing day.
Closing Costs: The Numbers
While it’s important to get pre-approved for a mortgage, it’s equally important to budget for closing costs. Closing costs can add up to anywhere from 1.5 to 4 per cent of the purchase price of a home. If you’re a first-time homebuyer making a 5 per cent down payment, that extra expense can take a big bite out of your budget. While 1.5 to 4 per cent may not sound like a lot, when you’re buying something as expensive as a house it really adds up.
For example, let’s say you’re buying a beautifully renovated bungalow in an up-and-coming suburban neighbourhood for $550,000. If you’re making a 5 per cent down payment, that’s $27,500 – but you’re not out of the woods yet. Another 1.5 to 4 per cent in closing costs means you’ll need to come up with anywhere from $8,250 and $22,000 – and that’s on top of your down payment. Let’s take a look at where that extra money goes.
Most Common Closing Costs
Here are some of the most common closing costs you’ll have to pay for:
- Home Inspection
- PST (8%) on CMHC Insurance (for any mortgages with less then 20% downpayment)
- Land Transfer Tax
- Legal Fees and Disbursements
- Title Insurance
- Prepaid Property Taxes and Prepaid Utilities
You may also be subject to various taxes and fees, depending on whether you’re buying a brand new property and need to pay HST and development levies.
Why Closing Costs Vary
As mentioned before, closing costs can add between 1.5 and 4 per cent to the purchase price of your home. Why the big variance, you may ask? Although it would be nice to put a hard number on closing costs, there are a few expenses that will vary.
For example, your legal fees and disbursements depend on the real estate lawyer you choose and the purchase price of your house. Generally, the higher the purchase price, the higher the legal fees – this rule obviously also applies to CMHC, as well as any taxes you have to pay. Prepaid property taxes and utilities are a lot harder to budget for. Homeowners have the option of prepaying their property taxes for the entire year or paying by instalment. If the seller has prepaid for the year, you’ll have to pay them back a prorated amount based on the day you take ownership. Finally, whether or not you pay land transfer tax (and how much) depends on where you live and if you’re a first-time homebuyer who is subject to a rebate.
To be on the safe side, it’s best to plan for the worst-case scenario and put 4 per cent aside for closing costs. So, if you’re aiming to make a 10 per cent down payment on a $300,000 home ($30,000), try to save an additional 4 per cent ($12,000) to make sure you’re covered on closing day.
Now please tell me you will never, ever forget about your closing costs again!
To start calculating your closing costs right away, make sure to visit MyClosingCosts.ca, follow them on twitter @MyClosingCosts for more information and helpful advice and like their Facebook page, I already did.
Have a question or two about your closing costs? I would be more then happy to answer them, just leave it below.