Breakdown of Closing Costs in a Purchase

This blog post is brought to you by David Larock over at Integrated Mortgage Planners. To read more about him, you can find him over here.

Estimating your closing costs after the excitement of buying your home is about as appealing as sorting out travel insurance after you’ve booked your dream vacation. That said, closing costs are unavoidable so the best approach is to prepare for them ahead of time. The old rule of thumb for closing costs was to conservatively assume that they would account for approximately 2% of your purchase price but with HST being applied to some new home purchases, that approach is somewhat dated. Today’s post will give you a brief explanation of closing costs and then I’ll close with a couple of insights that I think every home buyer should hear.

Closing Costs for Every Buyer

Land Transfer Tax

This is usually the largest single charge. It is calculated by taking your purchase price and multiplying it by a table of rates that rise with the purchase price. The top rate of 2% kicks in after $400,000, which means you pay 2% in tax on every dollar that you spend over $400,000. I know. Ouch. At least first-time home buyers get a rebate of up to $2,000.

The tax rate has not changed since June 1, 1989.

• 0.5% of the value of the consideration up to and including $55,000,
• 1% of the value of the consideration which exceeds $55,000 up to and including $250,000, and
• 1.5% of the value of the consideration which exceeds $250,000, and
• 2% of the amount by which the value of the consideration exceeds $400,000 for land that contains at least one and not more than two single family residences.

Legal Fees and Disbursements

The lawyer’s fee for his/her time can only be estimated until you get a quote. Don’t be shy to ask for one. If you need a great real estate lawyer, let me know, I work closely with a few excellent ones that will be in great contact with you. I know a lot that are not very good at communication. Fees vary widely from lawyer to lawyer and they are often based more on law firm policy than on difference in service. Standard disbursements include registering the deed and mortgage charge, performing a title search and preparing your tax certificate. Each disbursement includes a standard administration fee with the lawyer’s time added on top.

Closing Adjustments

These are reimbursements to the seller for any payments that were made for a period extending beyond the closing date. Put another way, you are reimbursing the seller for the portion of each charge that applies to the time when you are the owner. Examples include property taxes and condo maintenance fees. Interest Adjustment: Lenders like to start mortgage contracts on the first of the month, but buyers and sellers aren’t as regimented. Your interest adjustment cost covers the period between your closing date and your first scheduled payment (which if you choose to pay monthly is the first day of the following month). It works out to a little less than you would be paying if your mortgage term started on the same day you bought your house because it doesn’t include any principle repayment (it’s an interest only charge).

Fire Insurance

If you need a mortgage, your lender will insist that you have fire insurance. This isn’t a big upfront cost because you can pay it monthly, but you have to prove you’re covered before the lender will advance funds on your behalf.

Closing Costs for Sub-groups of Buyers

Mortgage Default Insurance

If you have a down payment of less than 20% you have to pay for mortgage default insurance so that if you default on your loan, the lender gets reimbursed. It’s based on a sliding scale where the smaller your down payment, the higher your insurance fee (CMHC is the largest provider). The fee is calculated as a percentage of your purchase price and you can add it to your mortgage balance, but you have to pay PST (8%) on the fee at closing. This is commonly forgotten by many financial advisors at banks.

HST for New Home Buyers

If you buy a new house after July 1, 2010, you have to pay HST. All buyers get a rebate of $24,000 regardless of the purchase price, which is the same as paying no tax on the first $185,000. Some builders are including the HST in their sale price, so be sure to check. Go to the government for always up to date information here!

New Home Warranty Program

New home buyers are required to enroll in the Tarion New Home Warranty program. Most builders also include this cost in the sale price but otherwise you will have to pay the fee at closing. Your new home warranty begins before you even move in. Once you provide the down payment for your new home, it’s protected. You also have a right to compensation if your builder delays the closing of the sale without giving you proper notice. Before you take possession of your new home or condominium, your builder will walk you through a pre-delivery inspection (PDI). For freehold homes, the builder pays the warranty enrolment fee to Tarion on or before the date the building permit for the home is issued. Condominiums are enrolled at least 30 days before construction begins. Tarion then gives the builder an enrolment number for the home. Some builders will include the warranty enrolment fee in the purchase price of the home, while others show it as an item on the Statement of Adjustments. You can find out more here!

Status Certificate

Condo buyers need to pay for a status certificate, which their lawyer will review at closing. It includes the condo corporation’s financial statements and bylaws and it will give you a sense of the overall financial health of the partnership you are about to join. Your lawyer will use this document to gauge the probability of a significant increase in your condo fees. The good news is that the fee for this certificate is capped at $100. Want more information, go here!

Lastly, estimate your closing costs upfront and include them in your purchasing budget. Too many people wait until they’ve signed a purchase and sale agreement and then the money has to come out of their budget for new carpets and curtains. If you need to work out the costs, I can do that for you!