Closing costs: what are they?

Are you planning to buy a home? Whether this is your first transaction on the market or you're selling your current home to buy a new one, there are certain closing costs you'll have to pay.

Despite their importance, many buyers and owners are unaware of all the costs that are added to the property's purchase price. However, it's important to include them in your budget to avoid unpleasant surprises.

Want to learn more? Here’s an overview of the various legal and administrative fees you may have to pay to complete your real estate transaction.

Buying a home: more than just a down payment

It's a well-known fact that to buy a property, whether it's a house, condominium or anything else, you need a downpayment. At least 5% of the purchase price. For example, on a $450,000 home, that's $22,500.

However, this minimum percentage is usually not enough to purchase the property you want.

In addition to the down payment, several related expenses must be paid before or after the transaction is formalized at the notary's office. These are called closing costs. You'll need to be able to pay them, as most of them cannot be added to your mortgage.

How much are closing costs on a house?

The amount of money you will need to pay for all the costs associated with your transaction depends on many factors, including whether you are a buyer or a seller.

In general, it's recommended that you budget between 1.5% and 4% of the purchase price of the property for closing costs. For example, for a $450,000 home, this would be between $6,750 and $18,000.

The 1.5% is the minimum required for a CMHC-insured mortgage, but it's always better to plan for more. If you're buying a home, plan on spending about 3% of the purchase price on closing costs.

If you're buying and selling a home simultaneously, your closing costs will be higher, since you're paying for two transactions. You'll need to budget for at least 4% cash flow, plus an emergency fund for unforeseen circumstances.

What are the closing costs for a real estate transaction?

Closing costs include many of the costs associated with completing a real estate transaction. They also include other expenses that may arise before and after the transaction that require additional cash.

Here's a look at some of the sometimes overlooked costs you may incur.

Closing costs for the buyer

There are more amounts to be paid by the buyer than by the seller.

Pre-purchase inspection

While not a closing cost per se, it's important to budget for the cost of a pre-purchase inspection. It's an important step in the buying process that shouldn't be overlooked, not least because it can protect you from hidden defects and other unpleasant surprises.

Depending on the region, the type of property being inspected, the complexity of the inspection, and the inspector chosen to perform the verification, the bill will be higher or lower. Expect to pay at least $650 plus taxes for a single-family home inspection.

Land transfer tax

Also known as the "welcome tax" in Quebec, this tax is due a few months after you sign the deed at the notary's office.

The amount you pay depends on the purchase price of your property and the municipality in which you're located. Tax rates are generally the same throughout the province, except for Montreal and Quebec City, which have different tax brackets.

Sales taxes

If you're buying a new property, you'll have to pay taxes on the sale price. You'll need to budget for GST (5%) and QST (9.975%) if you live in Quebec.

However, it is possible to get a tax refund on the amount paid if you qualify and apply.

Also, if you purchased your property on the resale market, you won't have to pay these fees.

Notary fees

The buyer must pay the cost of verifying the title, preparing and signing documents. These transaction fees typically range from $450 to $500.

Please note that depending on the steps taken by the real estate professional and the complexity of the transaction, the seller may also have to pay a portion of the notary's fees.

The buyer will also be responsible for notary fees, which start at an average of $1,200 plus taxes for a real estate transaction in the province.

CMHC mortgage loan insurance

If your down payment is less than 20% of the purchase price of the property, you'll need to purchase CMHC mortgage loan insurance. This protects your lender in the event of a default of payment.

Although it's not usually considered part of your closing costs because it can be amortized over the time of your mortgage, it's important to mention it because of its significance.

What's more, in Quebec, Ontario and Saskatchewan, insurance is subject to provincial sales tax, which must be paid in full at the time of the transaction.

Title insurance

Title insurance is not necessary in all situations, but may be required by some lenders. It protects in the event of title defects or ownership disputes.

Unlike other types of insurance, it is usually payable in a lump sum.

Adjustment of expenses already paid by the seller

If the seller has already paid certain expenses related to the property, such as property taxes or utilities, you may be required to compensate the seller for a portion of these expenses after the closing date. The amount you'll have to pay will depend on the amounts paid and the excess.

Closing costs for the seller

Like the buyer, the seller must pay several fees when selling their property. These include the certificate of location, mortgage penalties and the real estate broker’s commission.

Certificate of location

This document is essential to any real estate transaction and confirms the boundaries of the property, the location of its structures and its conformity.

In Quebec, the certificate of location must be given by the seller to the buyer. If the seller does not have one, or if the document no longer reflects the current state of the property, he or she must obtain one from a land surveyor, who is the only expert authorized to issue one.

The rate proposed by the OAGQ (Ordre des arpenteurs-géomètres du Québec) for the preparation of a certificate of location is $1,550 for a single-family home. The price may vary from one surveyor to another.

Mortgage prepayment penalties

If a homeowner sells his property before the end of the mortgage term, he must pay a prepayment penalty to his financial institution. The cost varies depending on the lender's method of calculation and the time remaining until the end of the term. The earlier the contract is broken, the more expensive the penalty will be.

Mortgage release and discharge fees

To formalize the change of ownership, the notary must obtain a release of the seller's mortgage. There is an obvious fee of approximately $150 to remove the release from the land registry.

You will also have to pay the notary's fees for this service.

Real estate broker's commission

If you're selling your home through a real estate agent, you'll have to pay the broker when the sale closes, according to the terms of the agency contract you signed.

A real estate broker's commission is negotiable and varies from one professional to another. It generally ranges from 4% to 7% of the sale price.

If the buyer also uses the services of a real estate agent, the two professionals will split the commission.

Other costs to consider

In addition to the many costs listed above, there are many other regular expenses associated with owning a home. It's important to be aware of these so you can add them to your budget and get a clear idea of the total cost of your project.

These include:

• Home insurance, to protect your property in the event of a loss;
• Property taxes, payable annually as a percentage of your property's value;
• Condominium fees, if you're moving into a condominium;
• Moving expenses;
• Maintenance and repair costs;
• etc.

In short, a real estate transaction is a project that requires careful financial planning, especially in the case of a new purchase. Don't underestimate the costs you'll incur. With a well-prepared budget, you'll have all the odds in your favour to make your project a success.

Do you want to buy or sell your home?

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