Closing costs can add up to tens of thousands of dollars when purchasing a home in Canada. If you’re saving for a down payment, you absolutely must understand what closing costs you’ll be expected to pay. From lawyer fees, taxes, and title insurance, closing costs can have a significant impact on your ability to afford a home. In this article, I’ll help you understand closing costs and share a real-world example of closing costs when purchasing a home in Canada.
What Are Closing Costs?
Closing costs are one-time expenses incurred when purchasing a home. The most common expenses are legal fees, appraisal fees, and title insurance. Other common closing costs in Canada include property transfer tax, sales tax, and mortgage default insurance. Common expenses that are not considered closing costs include moving costs, carpet cleaning, and home repairs. Other expenses like your deposit and down payment are also incurred on closing but aren’t considered closing costs.
Closing costs can vary depending on the province, home type, and whether the property is a new build. It can also be impacted by your status as a first-time home buyer. Overall, most estimate that closing costs range between 1.5 and 4% of the selling price of a home. However, this is a very rough estimate. It’s important to come up with an accurate estimate for closing costs before you enter into real estate transaction.
Closing Costs When Buying a Home in Canada
Let’s go through all of the most common closing costs when buying a home in Canada. This list is informed by my own experience purchasing my first home in 2019. As I go through each of the closing costs, I’ll share the amount I paid. Hopefully, by sharing the details of my purchase, you’ll have the context required to come up with an accurate estimate for how much you can expect to pay in closing costs for a home in Canada.
Inspection
Although not typically considered a closing cost, the first expense you’ll likely incur when buying a home in Canada is an inspection. Inspectors are licensed at the provincial level and charge anywhere from $300 to $800, depending on your home’s size. Some inspectors who use thermal imaging or other gadgets to search for moisture, insulation deficiencies, and electrical hot spots can be even more expensive, often charging $1,000 or more.
When purchasing our home, we went with a well-known inspector from our area. He was familiar with the neighbourhood and spent about 3 hours on his inspection. This was followed by an hour of presenting his report to us and answering our questions. His inspection included the house’s interior and exterior, appliances, and all heating and electrical systems. The total cost for this inspection was $553 after tax.
Appraisal
The next closing cost regularly incurred when buying a home in Canada is an appraisal. The purpose of an appraisal is to reduce the risk of your loan. An appraisal assures your lender that your mortgage loan is backed by sufficient assets to protect them if you fail to pay your mortgage.
Appraisal fees usually fall in the $250 to $400 range. Your mortgage broker or lender will advise you on which appraiser they prefer to work with. Our mortgage broker suggested an appraiser who charged a reasonable fee of $250. Lucky for us, our mortgage broker later reimbursed us for this fee on closing.
An appraiser’s job is to review the home and comparable properties to come up with an estimated value. They also estimate the remaining economic life of the property. The property’s remaining economic life can sometimes influence the maximum amortization period that your lender offers you. For example, if your home only has 20 years of economic life, your lender may not offer you a 25-year amortization.
Legal Fees
Legal fees are a requirement when buying a home. Your real estate lawyer will be responsible for facilitating the financial transaction, updating the home’s title, and settling any adjustments. The amount of legal fees you may be subject to varies. In our case, we paid $1,475 in direct legal fees.
Adjustments
Your real estate lawyer will work with the seller to determine the amount of property taxes, strata fees, and utilities you may owe as part of your closing costs. These costs are usually paid quarterly or annually. So, as it happens, some amount of those taxes or fees would have already been paid by the seller. To make things fair, your real estate lawyer will calculate your portion of these expenses based on the date of closing.
When purchasing our home, we had to pay $642 in property tax adjustments. This amounted to 20% of the annual property taxes already paid by the sellers.
Title Insurance
Purchased by your lawyer, title insurance is used to protect you in the event of a property ownership dispute. Lenders require title insurance because title defects can be extremely costly and may jeopardize a borrower’s ability to pay their mortgage. By having title insurance, both the buyer and the lender are protected if an issue arises down the road with the property’s title.
Our real estate lawyer acquired title insurance for $229. Taking into account title insurance, property tax adjustments, fees, and disbursements, our total legal fees and related costs came to $2,411.18.
Mortgage Default Insurance
Canadians with a down payment of less than 20% of the purchase price are required to buy mortgage default insurance. This insurance is offered by CMHC and other insurers and is used to protect the lender if you default on your mortgage. The cost of mortgage default insurance can be significant. For buyers purchasing a home with only 5% down, mortgage default insurance can add 4% of the total loan value to the purchase cost.
| Down Payment | Insurance Premium |
| 5% | 4.0% |
| 10% | 3.1% |
| 15% | 2.8% |
| 20% | 0% |
If we purchased our home with only had a 5% down, we would have needed to pay over $30,000 in mortgage default insurance. However, unlike with other closing costs in Canada, this amount would have been added to our mortgage balance and amortized over the life of our loan.
Mortgage Default Insurance PST
Although mortgage default insurance is amortized over the life of the mortgage, the provincial sales tax levied on the insurance must be paid on closing. PST in British Columbia is 7%. So, had we only put 5% down, we would have had to pay over $2,000 in PST as part of our closing costs.
Property Transfer Tax
In most provinces, a property transfer tax (also called land transfer tax) must be paid as part of the closing costs when purchasing a home. The amount of tax is based on the purchase price of the property. On an average home, property transfer tax is one of the most expensive closing costs when purchasing a home in Canada.
In B.C., the property transfer tax starts at 1% on the first $200k, 2% on the next $1.8 million, increasing to 3% on the next million. There is a rebate for first-time homebuyers if purchasing a home worth $500k or less. Although we were first-time homebuyers, our home’s purchase price made us ineligible for this rebate. As a result, we were subject to a property transfer tax of $15k.
Some municipalities apply their own property transfer tax. Had we purchased our home in Toronto, we would have been subject to over $13k in additional taxes.
GST on New Homes
Totally new homes require buyers to pay GST (or HST) on the full purchase price. For example, a $500k home would be subject to $25k in GST. Given the substantial cost of this sales tax, buyers will often seek to have the GST owed added to their mortgage loan. That way, instead of paying GST/HST upfront, it can be amortized over the full term of their mortgage.
Luckily, there is some reprieve for Canadians buying homes worth $450k or less. The GST/HST New Housing Rebate is available via Form GST190 when filing your personal income taxes. This rebate can reduce your GST/HST bill significantly if the home is used as your primary residence.
Closing Costs When Selling a Home in Canada
There are a few different closing costs Canadians may be subject to when selling their home. These costs are often more expensive than the closing costs when purchasing a home in Canada.
Realtor Fees
Realtor fees are the main closing cost when selling a home in Canada. As a seller, you’re responsible for both the buying and selling agent’s commission. Realtors charge a commission based on the selling price of a home. A common commission structure is around 6% on the first $100k and 2% on the remaining balance. On a $500k sale, the realtor commission would total $14k – a huge expense that every home seller must be aware of.
Mortgage Penalty
Another substantial closing cost for Canadians selling their home is their mortgage penalty. A mortgage penalty is charged when borrowers seek to break their mortgage early. This happens when a borrower wants to refinance their mortgage, or in the case of a sale, to move to a new property.
This pre-payment penalty can be expensive and depends on the time remaining on your mortgage term, your mortgage balance, and rate type. On the low-end, your mortgage penalty could be 3 months’ interest on your remaining mortgage balance. Otherwise, your mortgage penalty may be based on your lender’s “interest rate differential,” which could be prohibitively expensive. It’s best to speak to your lender to get an estimate of what the penalty may be to break your mortgage.
When shopping for a home, you may want to look for a mortgage that offers a reduced penalty – or no penalty at all. This usually means that you won’t be offered the lowest available interest rate. But, for many Canadians who move or refinance before their mortgage term is up, having a mortgage with a reduced pre-payment penalty can save them thousands.
Legal Fees
Legal fees are another important closing cost when selling a home in Canada. Just like when purchasing a home, your real estate lawyer will sort out the home’s title and facilitate the financial transaction. The lawyer will also draw up a statement of adjustments, which may allow you to be repaid for a portion of your prepaid property taxes, strata fees, and utilities.
Capital Gains Tax
For some homeowners, capital gains tax can be a significant closing cost when selling their home. Luckily, Canada has an exemption for anyone selling their primary residence; your capital gains will be sheltered from taxes when selling your home. However, if you’re selling a property that isn’t your primary residence, like a rental property, you will be subject to capital gains tax. The tax is calculated using your marginal tax rate multiplied by half of the capital gain you receive by selling your property.
Can Closing Costs Be Included in a Mortgage?
Including closing costs in your mortgage can be advantageous as it reduces the amount of money you need to spend up-front when purchasing a home. To accomplish this, you’d need to ask your lender – usually through your mortgage broker – to increase your mortgage’s size to cover your expected closing costs.
Some closing costs, l like mortgage default insurance and GST/HST, are often added to a borrower’s mortgage balance. That can be a lifesaver, as these closing costs can amount to tens of thousands of dollars. However, adding other closing costs to your mortgage isn’t especially common. Your lender may not offer this extra financing, or if they do, they may increase your interest rate.
Budgeting for Closing Costs in Canada
The easiest way to budget for closing costs when buying a home is to determine if you need to pay property transfer tax or GST/HST on your purchase. That’s because these two costs are usually the highest closing costs you’ll incur when purchasing a home in Canada. Next, if you require mortgage default insurance, estimate the PST you’ll be required to pay on that insurance. Finally, add around $2-$3k for all other closing costs: inspection, appraisal, legal fees and adjustments. That will give you a good estimate of the total closing costs you’ll pay when purchasing a home in Canada.
Saving on Closing Costs in Canada
It can be difficult to save on closing costs. Other than finding a less expensive real estate lawyer or skimping on an inspection, there are few opportunities to save when buying a home. However, there are a few different ways to offset your closing costs. The first strategy is to look for promotions from your lender. Often, lenders will offer cash bonuses for borrowers looking for a mortgage on a home. If your lender is a big bank, they may require you to open a new bank account or sign up for a credit card.
When purchasing our home, we found that our lender offered $2,000 to any borrower applying for a mortgage. The only requirement was that you had to open a chequing account. We visited their branch and confirmed we were eligible for the money even though we found them using our mortgage broker. After opening the account, we received the $2,000 soon after closing on our home. After a few months, we closed the chequing account since we were already happy with our existing accounts elsewhere.
Another way to offset your closing costs is to ask your realtor for cash back. I recently shared this strategy and explained how I received $3,500 cash back from our realtor when purchasing our home. Between receiving cash back and receiving a $2,000 bonus from our lender, we managed to offset our closing costs by $5,500 when purchasing our home.
A Real-World Closing Costs Example
Here’s a breakdown of all of the closing costs we paid for when purchasing our home. As you can see, we spent $18,167.35 on closing costs. The largest closing cost we paid was property transfer tax.
Having a 20% down payment helped us reduce our closing costs. This allowed us to avoid mortgage default insurance and the PST that comes with it. We were also able to offset some of our closing costs with other income and rebates. Our appraisal was reimbursed by our mortgage broker, and we received $5,500 in total from our lender and realtor.
Conclusion
The year you purchase a home can be the most expensive year of your life. And much of that expense can be attributed to closing costs. That’s why it’s important to be informed about what you’ll need to pay when buying or selling a property. I hope that sharing my experience helped you understand closing costs and gives you a benchmark for how much you can expect to pay when buying a home in Canada.
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Basically, you can buy an apartment in another country just with the Canadian closing fees!
Very nice and detailed post. Thanks for sharing your thoughts scaring me even more from owning a house here. I stick with my “All-Season Trailer – Camper” idea unless the housing market crashes by 20% then will see.
Yep! Crazy, isn’t it? I sort of wonder how much all of the extra taxes and transaction costs impact the price of real estate. When you buy a home, it basically has to increase in value by $50k or something close to that for you to break even when you sell.