Once you are pre-approved for a mortgage that will help you to find the home of your dreams, your next step is to consider what other costs are involved. Many first-time homebuyers underestimate the amount they will need. Generally speaking, you’ll want to budget between 1.5% and 3% of the purchase price of the home to cover closing costs. These closing costs and additional expenses can impact your offer, the size of your down payment and the amount of mortgage you can qualify for. Only a few of the closing costs are optional, so be aware of these costs from the start.

Costs before your mortgage closes

Home Inspection

A home inspection is a great idea to make sure that there is nothing majorly wrong with the home before you take ownership. You can make the home inspection a condition of the purchase offer. A home inspector will assemble a report on the condition of the home for a fee of around $500, depending on the complexities of the inspection.

Deposit

Your deposit counts towards your down payment that is required when you make your offer to purchase a house. Your deposit shows the seller that you are serious and committed to buying their property. Unlike the down payment, there is no minimum payment.

Costs included in your mortgage closes

Mortgage Default Insurance

Only required when you are putting down less than 20% for your downpayment. This is added to the total mortgage that you require and it is amortized over the life of your mortgage. This insurance protects the lender in case the borrower (you) defaults on the loan.
Based on the amount of your downpayment the percentage of your mortgage insurance changes:
5% to 9.99% = 4%
10% to 14.99% = 3.1%
15% to 19.99% = 2.8%
Check out how you can avoid paying mortgage default insurance here, CMHC insurance.

Mandatory closing costs covered by the home buyer

Lawyer Fees

When you buy a house and get a mortgage, it is customary for real estate lawyers to be involved in the home buying process. You will want to start working with a real estate lawyer as soon as you want to sign an offer to purchase if you are buying a house. If you are doing a refinance you only need to see a real estate lawyer to sign the required document for the new mortgage. Lawyers will typically cost $1500 but it is best to talk to your lawyer and find out what their fees are.

Insurance

In Canada, it is important to have property insurance in place for when you take possession of your new property. This property insurance should cover the home and its contents. It will either be paid in monthly or annual premiums. Your mortgage lender will require proof of insurance in order for you to receive the money.
Most insurance companies will want you to have your home inspected before insuring the property. Go through these proceedings early so you don’t encounter any problems when you want to move into your new home.

Title Insurance

Most lenders require title insurance so that they are protected against any losses in the event of a property ownership dispute. This will be purchased through your lawyer or notary and approximately costs $100-$300.

Title Search

This can sometimes be included in the lawyer fees or the lender fees. If it is not included in one of those fees, you’ll pay approximately $30 for a title search to be conducted. It is important to conduct a title search. A title search is important because it will make sure that the title is free and clear of any issues, such as liens. It will also ensure that the person selling you the home has the legal right to do so.

Land transfer taxes

When a property is transferred from one person to another, there is a land transfer tax applied. For homebuyers in the GTA, there are two separate land transfer taxes to be paid: municipal and provincial. Land transfer tax is calculated as a percentage of the purchase price of the home that is payable on closing. They tend to be between 0.5% and 2%.

Adjustments

If you are purchasing a property from someone else you will need to pay them back for any property taxes, utilities or condo fees that they have already paid. The adjustments will be done for you by the lawyers.

Property Taxes

Property taxes are calculated as a percentage of the value of your home. It varies by municipality and needs to be paid every year. Your lender will give you the option to have an automatic payment plan set up with them. If you choose to do this your lender will set up an account for you, collect the additional money per month and then pay property taxes on your behalf. Many homeowners find this service extremely valuable for budgeting purposes.

Mandatory closing costs covered by the home buyer

Closing Day

The day that you finally take legal possession of your new home. It is highly important that the blue of your administration is complete by this point. That includes transferring your down payment to your lawyer. Transferring your down payment funds, especially from your RRSP can take time, and should be done several days before closing.

On the closing date, the following events will take place:
Your lender will provide the mortgage funds to your lawyer.
You must provide your down payment less the deposit to your lawyer along with the closing costs.
Your lawyer pays the previous owner, registers the home in your name, and gives you the deed and keys to your new home.

Closing Remarks

Now that you understand all of the closing costs involved in home buying you’re ready to look for a home. Get pre-approved today.