When buying a home, don't forget about the closing costs

Mortgage default insurance

If you’re purchasing a home with a down payment of less than 20%, you’ll have a high-ratio mortgage. In this situation, you’ll be required to purchase mortgage default insurance. This cost is 2.8% to 4% of your mortgage amount. While you can pay this as a lump sum, most people will choose to add it to their mortgage.

Mortgage default insurance is mandatory since it protects lenders if the homebuyer defaults on their mortgage. Since lenders are getting this protection, they can offer lower mortgage rates to homebuyers with a high risk mortgage.

If you have a down payment of 20%, mortgage default insurance isn’t required.

More: Calculate your monthly mortgage payment

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Land transfer tax

When buying a home in Canada, you will need to pay land transfer tax (LTT) or a flat fee. If you’re buying in Toronto, there’s also a municipal LTT, so you’ll be taxed twice. Since LTT is based on your purchase amount, it’s often your largest closing cost expense. How much you’ll pay depends on where you’re buying — ranging anywhere from 0.5% to 3% on average — so use an online calculator to estimate your costs.

If you’re a first time homebuyer in Ontario, British Columbia, and Prince Edward Island, there is a tax rebate available. First-time buyers in Toronto would also qualify for an additional refund. Since these rebates are capped based on the purchase price of your home, you’d only have to pay the difference in LTT when closing.

Legal fees, disbursements, and adjustments

To close on your home, you will need to hire a real estate lawyer. Generally speaking, you should expect to pay your lawyer between $700 to $2,000, depending on your circumstances. Consider this money well spent, as your lawyer will take care of all the paperwork related to your home purchase, including:

• Reviewing the agreement of purchase
• Reviewing the status certificate and budget for condos
• Title search
• Title insurance purchase
• Ensuring property taxes are up to date
• Calculating land transfer tax owed
• Co-ordinating the mortgage documents and funding with the lender/seller
• Exchanging keys and legal documents with the seller’s lawyer

Keep in mind that the costs associated with your lawyer’s duties are on top of their fee. For example, you’d be paying the title search/insurance fees and LTT in addition to what your lawyer charges.

These costs would clearly be outlined by your lawyer. You can also have them give you a rough estimate, and plan accordingly.

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GST/HST on your new home purchase

When buying a new construction house or condo, you will be charged goods and services tax (GST) or harmonized sales tax (HST). The amount you’ll pay depends on the province you live in.

For example, new homebuyers in British Columbia would pay 5% GST, while Ontario buyers would pay 13%. For a $500,000 home, that works out to $25,000 and $65,000 GST and HST paid, respectively.

Some builders include GST/HST in the purchase price, so it’s just part of your mortgage. However, if the sale price says $500,000 + HST, you’ll need to come up with the taxes upfront when closing.

On a positive note, there is a GST/HST rebate worth up to 5% of the GST portion if your home is priced below $450,000. If your purchase price exceeds that amount, you’d only qualify for the federal portion of the rebate. The maximum rebate is $24,000 for those who paid HST and $16,080 who did not. The home purchased must be your primary residence to qualify for the rebate.

Appraisal fee

Your mortgage lender may require you to pay an appraisal fee to ensure the market value of your home is accurate. This will cost you between $200 to $500. Note that if the lender appraises your home for less than what you offered, you’ll have to come up with the difference before you close.

For example, you’ve purchased a home that costs $1 million. Since you have a down payment of 20% ($200,000), you’ll need a mortgage of $800,000. Your lender does an appraisal and determines the home is only worth $950,000, so the maximum they’ll lend you is $750,000. You’ll either need to find $50,000 before closing or get a new lender.

Property Taxes

Property taxes are a recurring expense rather than a closing cost, but there may be instances where you need to pay a portion of them at closing. This often depends on the policies of the municipality where the property is located.

For instance, if you're purchasing a home mid-year and the seller has already paid the annual property taxes in full, you’ll be responsible for reimbursing them for the portion of the year they no longer own the property. This reimbursement is typically included in the closing costs as a credit to the seller.

Moving and furniture

Hiring movers could easily run you $700 to $2,000 depending on how much stuff you have and where you’re moving. Of course, you could also rent your own moving truck and get a few friends to help out if you’re looking to save. Also, if you’re moving more than 40 kilometres for work, you can claim some of your moving expenses on your taxes.

Many people, especially first-time homebuyers, will also want to buy new furniture when moving. Fortunately, these purchases can be made over time, so you can plan accordingly.

Home insurance

Although not a closing cost, home insurance is something you’ll need to purchase in advance since lenders will require it before releasing the funds for your mortgage. How much you’ll pay per month will depend on various factors such as:

• Property type
• Age of home
• Location
• Internal construction
• Replacement costs
• Your credit score
• Roof
• Pets
• Special use

Generally, the cost to insure a condo will be less than a house since many replacement costs are already covered by your maintenance/strata fees.

There are hundreds of home insurance providers, and each has different ways of determining its monthly premiums. In addition, each insurer will typically offer different levels of protection, which will also affect your costs. It’s important to shop around as prices change every year.