It’s very common for first-time home buyers to forget all about closing costs. Even experienced home buyers may be caught off-guard by them, or may struggle to account for them.
This guide will help you understand closing costs, account for them correctly, and understand them as a potential point of negotiation.
What are closing costs?
Closing costs are transactional fees that come with every home purchase.
What do closing costs include in Canada?
- Land transfer taxes
- Title insurance
- Appraisal fees
- Home inspection fees
- Septic tank inspections
- Water tests
- Land survey fees
- CMHC insurance fees
- Property tax adjustments
- Government registration fees
- Estoppel certificate fees (condos)
- Non-resident speculation taxes
- Harmonized sales tax for new construction homes
- Interest adjustments
- Legal fees
Not all closing costs will apply to all sales. For example if you have a down payment of more than 20% then you won’t have to pay CMHC insurance.
Some closing costs are even optional. For example, we always recommend that home buyers have a home inspection before they take possession of the home. All purchases should be contingent on home inspection. The fee is usually around $500.
Costs that are mandatory include the land transfer tax, legal fees, appraisal fees, title insurance, and either CMHC or PST on insurance.
Who pays closing costs in Canada?
Some closing costs may be covered by your lender. For example, appraisal fees are often handled by your lender.
Technically the buyer is responsible for closing costs, and buying a house with cash closing costs can be one of the most cost-effective ways to handle them. Yet in reality, this is a negotiable point. Sellers often cover the closing costs as an incentive to sell the house faster, or offer to cover a portion of them. These are called seller credits, and when this happens the paperwork will include a seller credit on closing disclosure to outline exactly which credits have been included in the home purchase.
How much should I budget for closing costs?
Closing costs usually run between 3% and 5% of the purchase price of the home. So if you’re buying an $100,000 home, you can expect to pay $3000 to $5000 on closing costs. For a $300,000 home they might run from $60,000 to $15,000. Closing costs will almost never drop below 1.5%.
Another way is to ask your realtor or real estate lawyer what the land transfer taxes will be, since these taxes do make up the bulk of most closing costs. Here in Alberta you won’t have them, so closing costs might be cheaper, but you might want to research them for other provinces.
You can also use a closing cost calculator. Here’s a good one from WOWA.
Can closing costs be rolled into a Canadian mortgage?
You may be able to roll some closing costs into your mortgage, but not all of them. Namely, the land transfer tax must be paid at closing. Sometimes the mortgage insurance and administrative costs may be rolled into your mortgage.
Are closing costs tax deductible in Canada?
Some closing costs are tax deductible. For example, legal fees and appraisal fees are tax deductible. Property taxes aren’t deductible on your own home, though they are on rental homes.
Some years the federal government may offer certain tax credits for first time home buyers. For example, the federal government has run a First-Time Home Buyer Tax Credit program since 2009. It’s for a single property that you live in. You get a $750 deduction on your income tax. This can even lower your tax bracket so it’s well worth exploring.
Canadian tax law changes every year, and it’s intensely complicated. This is not considered to be tax advice. Speak to your accountant before attempting to deduct any closing costs on your taxes.
What happens if you can’t afford the closing costs?
This is a problem that most often plagues first-time home buyers, as sellers tend to have at least a little bit of equity to work with when purchasing their second home, and often use this money to cover down payments and closing costs.
One thing you might want to do is research local rebates. For example some cities offer closing cost rebates, and occasionally the provinces offer them as well.
If you make less than $120,000 a year you can apply for a 5% to 10% incentive from the government. The government lends you 5% to 10% of the purchase price towards a down payment, freeing up more money for you to pay closing costs. You pay them back when you sell the home, or within a 25-year period of time. You can learn more about the program here.
Here in Alberta there are two additional programs. First there’s the PEAK Housing Initiative. These allow you to buy certain units designated as PEAK units. Once approved, PEAK provides a second mortgage for a partial or full down payment of up to 5%. Again, this can free up money to use on closing costs.
If you’re in Calgary you can take advantage of the Calgary Attainable Homes Program. You must contribute $2000 in down payment money and the Attainable Homes Program will cover the rest.
If you are worried you won’t be able to afford closing costs you should also speak to your realtor and your real estate attorney. They may be able to negotiate these costs down for you prior to signing the purchase contract. For example, they may be able to negotiate having the seller cover a portion of these costs, and negotiate rolling some of it into your mortgage, which means the land transfer tax will be all you’ll have to worry about.
It is best, of course, if you can save up for these costs and account for them before you start shopping for a home.
How do you take possession of a house after closing?
Often, the seller will just provide the keys at the closing, but this isn’t always the case. Sometimes sellers negotiate a little more time to move out, for example. The typical possession date is set for one to three days after the closing date, but this can vary wildly depending on the state of the market.
Your purchase contract should include the specified date and time wherein you will receive your keys. It will often outline where you will be provided with the keys as well.
It is very important for you to make sure that your real estate attorney has placed this information in the contract, or you can face unexpected delays and headaches that prevent you from moving in when you’d planned or expected to. If sellers do not move when they have agreed to move you might be able to charge a seller rent-back equal to the seller’s original mortgage payment. This is another term that your attorney will often bake into your purchase contract.
Read your purchase contract carefully to get a sense of what the terms and conditions will be in your unique case, and consult with your Edmonton real estate attorney if you have any questions.