What you should know about closing costs

BY: JAY BRIJPAUL 

When buying a home, in addition to the down payment, buyers must pay closing costs. Closing costs is the amount of additional money buyers will need to transfer the home into their name. Closing costs vary from one transaction to another.

A home inspection is optional, but it is recommended. A home inspection costs as low as two hundred and fifty dollars for a condo and can be several hundred dollars for homes with septic tank and wells.

Financing is complex. If your down payment is 20% and over, your credit is clean, and your income is good, then it is not expensive to finance. If your down payment is less than 20%, then the mortgage must be insured by CMHC for the bank’s protection. Usually, banks add the premium to the mortgage. The insurance premium may cost as much as 4% of the mortgage for buyers whose down payment is only 5%. Although the bank lends the premium to the buyer, there is a cost for HST on the premium. CMHC will also charge a processing fee. If you are using a mortgage broker or a secondary lender, then there might be other fees such as mortgage broker fees, lender fees, and finder fees. In some situations, the buyer may need two mortgages and the fees can escalate. Most banks will need an appraisal done at the buyer’s expense prior to lending. Always ask for a mortgage commitment letter before you remove your financing condition. The commitment letter will disclose all the fees associated with the transaction. 

Land transfer tax is about 1 ½% of the purchase price for homes over $400,000. First-time buyers are exempt to a maximum of $4,000. To qualify as a first-time buyer, you or your spouse must have never owned a home anywhere in the world. If you are not a first-time buyer and purchase in the 416 area, your land transfer tax doubles. An average home of about $750,000 will run you just shy of $23,000.

For newly built homes, there are other charges such as new home warranty, education lot levy, grading fees, tree planting fees and fees for water, gas and hydrometers. There are other hidden fees such as cost for a survey, builder’s mortgage discharge fees, and deposit verification fees. If it is an investment property, then cater for HST to a maximum of $24,000. Upgrades are not included in the mortgage and must be paid separately so you should budget accordingly.

Legal fees must be paid on closing. Lawyers assist the banks in the preparation and recording of legal documents and transfer the property to the buyer. Lawyer fees vary from one attorney to another. In addition to lawyer fees, buyers must pay for disbursements. Disbursement is money the lawyer must pay for certain services, for example, the cost incurred in registering a mortgage. There are other closing costs such as the cost to obtain title insurance, fire insurance, tax certificate, courier and photocopying charges. Always ask your lawyer for a statement of adjustment. It explains in detail how your money is being spent.

There can be other hidden costs, for example, if the seller pays the entire year’s property tax, then the buyer will be required to adjust accordingly. In many instances, there is an interest adjustment date. The mortgage payment is due at the end of the month and if the transaction closes in the middle of the month, then the interest for the remaining period must be paid upfront.

If you are selling and buying, then consider commissions plus applicable HST on the sale of your home. To discharge a mortgage, the cost is the higher of three months interest or the interest rate differential for the remainder of the term. Many times, there is a string of transactions in synchronicity. The other party is relying on your money to close their transaction. If the deal cannot close on time, then, it’s like a multiple collision and you are at fault.

In addition to the down payment, consider extra money for closing costs. It is not a pleasant experience to find out at the last minute that there is a huge shortfall. An experienced realtor can save you that trouble.