Photos: James Bombales
Buying a home is a major investment and the largest financial transaction most people will make in their lives. In addition to the purchase price, interest rates, and condo fees, homebuyers need to be aware of their closing costs. Expenses such as legal fees, land transfer taxes and insurance can add up, leading many homebuyers to underestimate the amount of cash on hand that they’ll need when it comes time to close on the transaction.
To learn more about closing costs and what you should be prepared for, Livabl turned to Ara Mamourian, partner at Property.ca Realty Inc. and founder of thespringteam.ca, and David Duncan, vice president, real estate secured lending, at TD Canada Trust to answer our questions.
1. How much should homebuyers put aside for closing costs?
“As you save for your home, it’s a good idea to build in a 3 to 5 percent of the purchase price as a buffer for closing costs where possible,” says Duncan. “This way, you’ll have funds available if costs end up being higher than anticipated.”
If your final closing costs end up being less than what you put aside. you can put that money towards your mortgage or keep it as an emergency fund to help cover repairs or future renovation projects.
2. When are closing costs paid in a real estate transaction?
“Closing costs are typically paid at the closing of a real estate transaction,” says Duncan. “The closing is when the title of the property is transferred from the seller to the buyer, and the buyer officially takes possession of their new home.”
3. What are some common closing costs that people should save for?
“In addition to ongoing costs like mortgage payments, property taxes, maintenance and utilities, it’s important to understand all upfront costs over and above your down payment,” explains Duncan. “It’s a good idea to build in a little extra, just in case anything unexpected arises during closing or when you take possession of your new home.”
Examples of common closing costs include property assessments, property surveys, home inspection fees, legal fees, title insurance and moving fees. However, in most cases the land transfer tax amounts to the lion’s share of costs according to Mamourian. “If you’re a first-time buyer, you are eligible for a rebate of the municipal portion of up to $8,475 then legal fees would come in at around $1,800.”
Homebuyers should also be aware of any pre-payments by the seller that may need to be reimbursed. “Sometimes homeowners pay for all their property taxes up front for the year so if you move in half way through the year you’d have to reimburse the seller for that amount,” says Mamourian.
4. What are some unexpected costs that homebuyers could face?
Unexpected or hidden costs are always a concern for new homeowners so it’s important to plan ahead and build a buffer into your budget. “As you get closer to buying a home, consider taking your monthly mortgage payments for a test-drive by making an automatic transfer of that amount into a TFSA or other high-interest savings account for a few months,” suggests Duncan. “This two-fold approach allows you to see how comfortably you can pay off the monthly mortgage and save extra money for unexpected costs that could arise, while also helping you save for a larger down payment.”
In rare instances a special assessment may be required in a condominium when a major repair is needed that surpasses the condo’s collective reserve fund. “Special assessments only happen if something has either gone wrong or if the reserve fund isn’t able to handle a capital expense that the board and residents approve,” says Mamourian. “If this comes into play at closing, it’s not a surprise and the buyer signs up for it.”
When it comes to homeownership, it’s a good idea to prepare for unexpected repairs or maintenance items. “Don’t ever expect to buy a house and have zero expenses,” says Mamourian. “That’s the thing about houses versus condos — most people have this misconception that condo fees are just wasted money but when in reality it’s just a fixed, predictable maintenance cost whereas in a house that annual cost is variable.”
5. Can homebuyers roll their closing costs into the mortgage loan?
“The only closing cost that can be rolled into a mortgage is your CMHC insurance premium,” says Mamourian. “CMHC premiums are payable only by those who are putting down less than 20 percent of the purchase price in cash as a down payment.”
“Homebuyers can always consider reducing their down payment to help cover closing costs however, they’ll end up with a larger mortgage,” adds Duncan.
6. Do closing costs differ by location?
As mentioned above, land transfer taxes can take up a large portion of your total closing costs but not all land transfer taxes are the same. They can vary significantly by province and municipality. “The City of Toronto has its own land transfer tax on top of the provincial one so buying in Toronto is more expensive not only with the price of properties but also with closing costs,” says Mamourian.
7. Can homebuyers negotiate with sellers to pay the closing costs?
Homebuyers can always try to negotiate on closing costs, but it depends on the market. “In a seller’s market, you can’t be making demands like this,” says Mamourian. “In a buyer’s market, it’s open season, but rather than asking to pay closing costs like you see on TV, it’s usually just built into the offer price and still paid by the buyer.”
8. What are some tips for how homebuyers can potentially reduce their closing costs?
“The total cost associated with items you’ll need during closing can range, depending on location and who you work with to do the close,” says Duncan. “For example, someone moving within the same province or city should pay less in associated moving fees compared to someone who is moving across the country. The associated legal costs may also vary depending on who you work with and what they charge for closing the transaction so it’s a good idea to contact different firms and ask for quotes.”
At the end of the day, when it comes to closing costs, the most important step is to plan ahead and build a buffer into your total budget.
9. Is there anything else that homebuyers should be aware of when purchasing a home?
From closing costs and land transfer fees to property taxes and everyday maintenance costs, the price of homeownership is much more than your down payment and monthly mortgage payments.
“Calculate how much you spend each month on everything — rent, groceries, insurance, loans, taxes, entertainment, etc. — to determine what you can comfortably afford altogether and take advantage of helpful tools like TD’s Mortgage Affordability Calculator,” says Duncan. “From there, you can work with a financial advisor to develop a plan that will allow you to save for a down payment, ensure you have money put aside for closing costs and unexpected expenses that may arise, and be able to live the lifestyle you desire in your new home.”