Buying a home is a significant milestone, but it comes with costs beyond the purchase price. One of the most important—and often overlooked—aspects of homeownership is closing costs. These are the fees and expenses required to finalize your home purchase. For Canadian buyers, understanding and preparing for closing costs is crucial to avoid surprises on closing day. This guide breaks down what closing costs are, how much to budget for, and what to expect during the process.
1. What Are Closing Costs?
Closing costs refer to the additional fees and charges you’ll need to pay when completing the purchase of a home. These costs cover everything from legal services to taxes and inspections. Typically, closing costs in Canada range from 1.5% to 4% of the home’s purchase price.
For example, if you’re buying a home for $700,000, you should expect to pay between $10,500 and $28,000 in closing costs. These expenses are separate from your down payment and cannot be rolled into your mortgage, so it’s essential to budget for them upfront.
2. Key Closing Costs in Canada
Here’s a breakdown of the most common closing costs you’ll encounter:
a) Land Transfer Tax (LTT)
Land Transfer Tax is one of the largest closing costs in most provinces. It’s calculated as a percentage of your home’s purchase price. For instance:
- Ontario: 0.5% to 2.5%, depending on the price of the home.
- Toronto: An additional municipal land transfer tax applies.
First-time buyers in many provinces, including Ontario and BC, may qualify for rebates to offset this cost.
Learn more about land transfer taxes and rebates.
b) Legal Fees
You’ll need a real estate lawyer to handle the legal aspects of the transaction, including reviewing contracts, conducting title searches, and registering the property in your name. Legal fees typically range from $800 to $2,500.
c) Mortgage Default Insurance (CMHC Insurance)
If your down payment is less than 20%, you’ll be required to pay mortgage default insurance. While this cost is usually added to your mortgage, the provincial sales tax (PST) on this insurance must be paid upfront in some provinces, such as Ontario and Quebec.
d) Home Inspection Fee
A professional home inspection ensures that the property is in good condition before you buy. Inspection costs typically range from $300 to $600. This is optional but highly recommended to avoid unexpected repairs.
e) Title Insurance
Title insurance protects you against issues with the property’s title, such as errors in public records or disputes over ownership. This one-time cost is typically $250 to $400.
f) Adjustments for Property Taxes and Utilities
The seller may have prepaid property taxes or utility bills. You’ll need to reimburse them for these costs, which are prorated based on the closing date.
g) Moving Costs
While not a direct closing cost, moving expenses can add up. Budget for movers, truck rentals, or related expenses, which can range from $500 to $2,000, depending on the distance and services required.
3. First-Time Buyer Incentives for Closing Costs
If you’re a first-time homebuyer in Canada, you may qualify for programs to help offset closing costs:
- First-Time Home Buyers’ Tax Credit (HBTC): A $5,000 non-refundable tax credit, which provides up to $750 in tax relief.
- Land Transfer Tax Rebates: Many provinces, including Ontario, offer rebates for first-time buyers.
Explore these incentives in our guide to first-time homebuyer programs in Canada.
4. How to Budget for Closing Costs
Planning ahead is essential to avoid financial stress on closing day. Here’s how to budget effectively:
Step 1: Estimate Costs Based on Your Purchase Price
Use the 1.5% to 4% rule as a guideline to calculate your closing costs. For example:
- Purchase Price: $800,000
- Estimated Closing Costs: $12,000 to $32,000
Step 2: Include Closing Costs in Your Savings Plan
In addition to your down payment, set aside funds specifically for closing costs.
Step 3: Ask Your Lender for a Breakdown
When getting pre-approved for a mortgage, ask your lender to provide an estimate of the closing costs based on your price range and location.
5. Closing Costs Unique to New Builds
If you’re buying a newly constructed home, additional closing costs may apply:
- HST (Harmonized Sales Tax): For new homes, HST may be applicable, but rebates are available for homes priced under $450,000 in some provinces.
- Tarion Warranty Enrollment Fee: Covers the cost of a warranty for newly built homes in Ontario, ranging from $385 to $1,500, depending on the price.
Learn more about closing costs for new construction homes.
6. Tips to Reduce Closing Costs
While some closing costs are non-negotiable, there are ways to save:
- Negotiate Legal Fees: Compare quotes from different real estate lawyers.
- Apply for Rebates: Maximize first-time buyer incentives and rebates.
- Bundle Services: Some mortgage brokers or realtors offer discounts if you use their recommended service providers.
7. What to Expect on Closing Day
Closing day is the final step in your home-buying journey. Here’s what happens:
- Your lawyer will complete a final title search to ensure the property has no liens or legal issues.
- You’ll sign all necessary paperwork, including mortgage documents.
- Your lawyer will transfer funds to the seller and register the property in your name.
- Once everything is finalized, you’ll receive the keys to your new home.
8. The Bottom Line: Be Prepared
Closing costs are an integral part of buying a home in Canada. By understanding what they include and planning accordingly, you can avoid unexpected expenses and ensure a smooth home-buying process.
Conclusion
Closing costs may seem like a small piece of the home-buying puzzle, but they can significantly impact your budget if you’re not prepared. From land transfer taxes to legal fees, knowing what to expect and how to budget will make your home purchase less stressful.
For more insights on budgeting, planning, and navigating the Canadian real estate market, check out our full library of articles on Homewise. Whether you’re a first-time buyer or a seasoned homeowner, we’re here to help you make smart financial decisions every step of the way.
