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The Bottom Line on Closing Costs

November 05, 2021

You’ve bought a home and your possession date is fast approaching. Exciting times! Nothing can spoil the joy and anticipation you’re feeling… except, of course, surprise expenses on closing day.

Don’t let closing costs catch you off-guard and put a damper on what should be an important and wonderful event. Being well-informed and financially prepared for closing costs can help ensure a smooth and stress-free home buying experience.

What are closing costs?

If you’re new to homeownership, you may not be familiar with the costs that are due on (or often a few days before) the day your home closes. Closing costs are one-time fees that are over and above the purchase price of your home and made up of the legal and administrative expenses you need to pay before you get the keys. Generally, you will pay your closing costs when you meet with your real estate lawyer to finalize the purchase of your home.

What are examples of common closing costs?

Here are some of the most common closing costs you’ll need to account for:

Land Transfer Tax

Land Transfer Tax: This tax is calculated as a percentage of the purchase price of your home. All provinces have a Land Transfer Tax except Alberta and Saskatchewan, and the amount varies across the country. Some cities, such as Toronto, also have a municipal Land Transfer Tax.

Because Land Transfer Tax typically makes up the largest portion of your closing costs, it’s a good idea to find out how much you’ll need to pay as early as possible, so you can factor these costs into your budget. Online calculators can be a great reference for determining this amount, as can your mortgage broker or real estate lawyer.

Land Transfer Tax

Legal Fees and Disbursements: These are fees that cover the preparation and filing of the official documents required for the purchase of your home. You can expect to pay approximately $500 plus GST/HST in legal fees, although this cost may go up if there is any additional complexity with your purchase.

Title Insurance

Title Insurance: Title insurance is an insurance policy that protects you (the owner) and your lender against challenges to the ownership of your home or problems related to the title of your home ("title" is a legal term that means you have official ownership of your property and you get it when the previous owner signs the deed over to you). Title insurance generally costs $100 - $300.

Interest adjustment

Interest adjustment: A mortgage interest adjustment is the amount of interest accumulated between your new home's closing date and the day your first mortgage payment is made. If your home closes mid-month but your mortgage is due at the end of the month, for instance, you’ll have to prepay some interest on your closing date to cover the gap in timing.

Property tax adjustment

Property tax adjustment: If the previous owner of your home prepaid property taxes for the full year, you may need to reimburse them come closing day. You may, however, have the option to set up an automatic payment plan with your lender, who would collect a portion of your tax payable along with your regular mortgage payment. Learn more about MCAP’s Property Tax Services and discover why you should pay your property tax with your MCAP mortgage.

If the previous owner prepaid any utility bills, your closing costs will include a reimbursement for these expenses as well, although they should be fairly minimal.

Provincial Sales Tax on mortgage default insurance

Provincial Sales Tax on mortgage default insurance: If the down payment on your property was less than 20%, you will have had to purchase mortgage default insurance. While the insurance premium can be added to your regular mortgage payment, certain provinces charge Provincial Sales Tax (PST) on the insurance premiums, which must be paid separately upon closing.

Keep in mind, while not official closing costs, expenses such as mortgage life and disability insurance and your utility set-up will also need to be paid at this time.

How much should I budget?

The amount paid in closing costs varies by buyer and depends on many factors including the purchase price of your home, the complexity of the transaction, whether the previous owner prepaid taxes and more. A general rule of thumb, however, is to set aside 3% - 4% of your home’s purchase price to cover closing costs.

Your real estate lawyer will outline all the costs for you, so you won’t need to do any calculations yourself.

Many home buyers, particularly first-time buyers, are taken by surprise by the amount they have to pay upon the closing of their home, which can lead to some last-minute stress. But when you’re ready for these expenses, you can focus on moving, decorating and settling in, rather than your closing costs.

When you’re ready to explore MCAP mortgage options, be sure to a talk to your mortgage broker. Already an MCAP homeowner? Feel free to contact us about your existing mortgage.