Breakdown Your Closing Costs - The Simple Costs of Buying a Home in 2023
Real estate investing is full of hidden costs and fees that will not be advertised when a property hits the market. Many of these mandatory expenses lie in wait at the end of the buying process bundled together in the form of closing costs.
While the seller is responsible for paying for things such as the realtor commissions and capital gains tax on the sale, there are a variety of costs and expenses that the buyer must face when they are purchasing a new property.
So, instead of letting these costs surprise you during the buying process, let’s take a look at closing costs so that you can budget for them accordingly.
But first, if you want to make sure you can avoid any excess junk fees in your closing costs, click the link below to book a free strategy call with us at LendCity and let us show you what to keep an eye out for.
What Are Closing Costs?
It is important to know that closing costs are not a single neatly packaged payment you make at the end of the buying process. Instead, it is a series of various payments that are required for various services that you need to use in order to complete a real estate purchase at the time of closing.
An Overview on Closing Costs
There are plenty of different factors you need to consider when you are calculating your closing costs. Here are some of the most notable costs you can expect to see on most of your real estate purchases.
Land Transfer Tax
Typically, when you are buying a property there is a tax on the purchase price of the home associated with putting the property under your name that is paid at the provincial level. These costs vary depending on the province you are buying in as well as the cost of the property.
In certain parts of Canada, there are also additional land transfer costs depending on the municipality. For example, on top of the provincial land transfer tax you would pay in Ontario, if the property is located in Toronto you will need to pay an additional municipal land transfer tax. In Nova Scotia, your provincial land transfer tax may vary by location, with certain municipalities being exempt from the tax altogether.
Insurance Costs
Insurance is an incredibly important part of the real estate buying process and upon buying a property there are certain key insurances you will need to secure straight away. This includes title insurance which protects you against any loss cause by defects of title – including real estate title fraud, fire, and property insurance in order to protect the property and your possessions in the event of a fire as well as mortgage default insurance.
One of the most common sources of mortgage default insurance is CMHC insurance, while the initial insurance premium can typically be bundled into the mortgage, the provincial sales tax (PST) on that insurance must be paid out of pocket at the time of closing. However, there are additional forms of mortgage insurance available which you may need to worry about at closing if you get them.
Survey, Appraisal, and Inspection Fees
During the buying process, there are multiple checks that can be run in order to ensure the condition, boundaries, and value of the property. These are often required by the mortgage lender, and each come with their own costs that you will need to prepare for.
If a property does not already have an up-to-date land survey that defines where the property’s boundaries are located, you will be forced to pay for the property to be surveyed.
As well, in order to confirm the condition and value of the property, you will likely require an appraisal and property inspection. These each come with their own fees that are wrapped up into your final closing costs.
Legal Fees
Finally, when you are working with a real estate attorney, they will need to be paid as well. Your lawyer will oversee the final transaction to ensure that everything is properly handled in regard to filing important documents and overseeing that the purchase agreement is legally binding and accurately represents the deal being made.
As well, some investors choose to work with a lawyer earlier during the buying process in order to help secure a lower price or negotiate sale conditions. This will likely come at an additional expense to the buyer.
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Lower Your Closing Costs by Avoiding ‘Junk Fees’
There are certain fees that occasionally turn up during the purchase process that you can avoid and should not be paying. These ‘junk fees’ are often normal parts of the process that are later given to you as separate payments or appear as the same service in multiple names.
For example, a lender may try to charge a ‘broker fee’ and an ‘origination fee.’ These are the same thing, so if you see both you should call it out and try to have one removed. As a rule, if you do not understand a fee you are paying at closing, go ahead and ask about it. You will either get the fee removed from your purchase if it is truly junk, or you will get an explanation and walk away more prepared for your next purchase.
How Much Should You Budget for Closing Costs?
So, with all of these fees and additional costs you can expect to pay while closing on a property – how much should you expect to pay for your closing costs?
While typically closing costs are roughly 1.5 per cent of the purchase price of the property, you should always budget for higher costs than you expect to pay. So, instead of planning for 1.5-2 per cent of your purchase price, you should try to have 4-5 per cent set aside. This way if costs wind up higher than you planned you can afford to cover them, and if they do not you simply have extra funds to put towards other things such as property improvements, furniture, or marketing the property as a rental.
Of course, before you can close on a property, you need to ensure that you have a great mortgage. That is why our team at LendCity is here to help you secure financing with the fewest junk fees weighing down your closing costs while still getting you the best available mortgage for your specific purchase.
To get started today, visit us at LendCity.ca or give us a call at 519-960-0370. Alternatively, click the link below for a free strategy call today.