How do Closing Costs Work in Canada?

Are you in the market for a new house? If so, you're probably wondering how much everything is going to cost, including fees and added expenses. Closing costs are an expense that can vary widely from one property to the next, so it's important to be aware of what they are and how they're calculated.

In this blog post, we'll break down exactly what closing costs are and provide some tips on how to keep them as low as possible.

What are closing costs?

Closing costs are the fees and expenses associated with buying a home. They can include everything from mortgage default insurance to land transfer taxes and legal fees. These costs typically range from 1.5-4% of the purchase price of your home, depending on the province you live in.

How much do you pay in closing costs?

The amount you'll need to pay for closing when buying a home in Canada will depend on the province you're purchasing in, as well as the price of your home. In general, they range from 1.5-4% of the price you purchased your home for.

Who pays closing costs in Canada?

In Canada, closing costs are typically paid by the buyer. However, there may be some circumstances where the seller pays pays this cost, such as in a buyers market or if the seller is motivated to sell quickly.

In these cases, it's important to negotiate with the seller ahead of time to determine who will be responsible for the costs of closing .

The most common closing costs in Canada

Mortgage default insurance

This is also known as CMHC insurance. It's a mandatory insurance policy for anyone who has a down payment of less than 20% on their home. The premium is typically added to your mortgage balance and paid off over the life of your loan.

Land transfer tax

This tax is charged by the province or municipality you live in when you purchase a property. The amount varies depending on the location, but is typically a percentage of the home's purchase price (e.g. 1% in Ontario).

Legal fees

These fees are for the services of a lawyer or notary who will help you with the closing paperwork and ensure that everything is in order.

Appraisal fee

This is a fee charged by the lender to have the property appraised (valued) by a professional.

Home inspection fee

This is a fee charged by a professional home inspector to assess the condition of the property you're buying.

Mortgage insurance premium

If you're putting down less than 20% on your home, your lender may require you to purchase mortgage insurance. This insurance protects the lender in case you default on your loan. This is different than mortgage default insurance, which is a legal requirement if your down payment is less than 20%.

Bonus tip: you can save a lot of money buying term life insurance instead of mortgage life insurance, for the same protection. Ask us how.

Utilities connection fees

These are the fees charged by your local utility companies to connect or disconnect services at your new home (e.g. hydro, water, gas).

Title Insurance

This is an insurance policy that protects you from any legal claims or problems that may arise from the purchase of your home. It helps with avoiding confusion such as what land is yours and what is your neighbour's.

Ways to avoid or reduce closing costs

There are a few ways to reduce or avoid closing costs when buying a home in Canada. One way is to ask the seller to pay for this cost. Another way is to see if your lender offers any programs that cover closing costs.

These are a few other strategies:

Shop around for a mortgage: Different lenders will have different costs, so it's important to compare your options.

Ask for closing costs to be included in the purchase price: If you're negotiating with the seller, you can ask that the cost of closing be included in the overall purchase price of the home.

Get a rebate on your land transfer tax: First-time homebuyers in some provinces (e.g. Ontario) may be eligible for a rebate on their land transfer tax.

Look for closing cost incentives: Some lenders may offer closing cost incentives, such as cash back or waived fees, if you choose to work with them.

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Do closing costs vary from province to province in Canada?

Yes, the cost of closing varies from province to province in Canada. For example, in Ontario, the land transfer tax is a closing cost that is paid by the buyer, while in Alberta, this tax is not applicable. Additionally, closing costs as a percentage of the home's purchase price will also vary depending on the province you're buying in.

It is important to research the province you're purchasing a home in so that you know what to expect.

Are closing costs the same for all types of properties in Canada?

No, costs for closing are not the same for all types of properties in Canada. For example, costs on a condo will typically be lower than those on a detached home. This is because there are typically fewer closing costs associated with buying a condo, mainly since the purchase price is lower, meaning a lower land transfer tax.

It is a good idea to talk to your real estate agent or lawyer to get an estimate of the closing costs for the type of property you're interested in before making an offer.

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How can you estimate the cost of closing in Canada?

There are a few ways to estimate your closing costs when buying a home in Canada. One way is to ask your real estate agent or lawyer for an estimate. Another way is to use an online closing cost calculator.

It is important to remember that costs for closing can vary depending on the province you're buying in, the type of property you're interested in, and the specific circumstances of your purchase. As such, it's always a good idea to get an estimate from your real estate agent or lawyer before making an offer on a home.

If the seller agrees to pay your closing costs, do you still have to pay taxes?

Yes, you will still have to pay taxes on the money that the seller agrees to pay for your closing costs. This is because the money is considered part of the purchase price of your home. In most cases, the costs for closing that the seller agrees to pay will be added to the purchase price of your home for tax purposes.

Can you negotiate the amount of closing costs?

Yes, you can negotiate the amount of closing costs with the seller or lender. This is something that you should discuss with your real estate agent or lawyer. They will be able to advise you on what is typical in your area and how to best negotiate costs for closing.

This is why it's important to have a licensed broker on your side when buying a home, so that you can be sure that you're getting the best deal possible.

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Conclusion

Closing costs are an important part of the home-buying process, and it’s important to understand what they are and how much you may need to pay.

In Canada, the person who pays the costs generally depends on the province in which you are buying a property. However, there are ways to reduce or avoid paying these costs altogether. The amount of closing costs you will have to pay can vary depending on the type of property you purchase, as well as the province where you live. 

There are many common costs of closing that buyers in Canada should be aware of. If you’re lucky, your seller may agree to cover some or all of your closing costs – but be sure to check with a tax professional about any tax implications this may have. 

Finally, these costs can be negotiable, so it’s always worth discussing this with your real estate agent, lawyer or lender to see if you can get a better deal.

FAQ

How do you calculate closing costs?

Generally, these costs include such items as recording fees, legal fees, title company fees, etc. due from/to buyer and seller when a property is sold. Other closing costs may include things like home inspections, appraisal fees, credit report fees and more.

A closing costs calculator can help you estimate your total costs.

How do you know if the closing cost is reasonable?

If you're unsure about whether the closing cost is reasonable, you can ask your real estate agent or lawyer for an estimate of closing costs in your area. You can also use an online closing cost calculator to get an idea of what costs might be.

What if you can't afford closing costs?

If you're having trouble paying for the costs of closing, there are a few options available to you. One option is to ask the seller to pay for some or all of the closing costs. Another option is to get a loan from a family member or friend. You can also look into government programs that may help with these costs.