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\u2019ll need when it comes time to close on the transaction.<\/p>\n
To learn more about closing costs and what you should be prepared for, Livabl turned to Ara Mamourian, broker and partner at thespringteam.ca, and David Duncan, vice president, real estate secured lending, at TD Canada Trust to answer our questions.<\/p>\n
1. How much should homebuyers put aside for closing costs?<\/p>\n
\u201cAs you save for your home, it\u2019s a good idea to build in a 3 to 5 percent of the purchase price as a buffer for closing costs where possible,\u201d says Duncan. \u201cThis way, you\u2019ll have funds available if costs end up being higher than anticipated.\u201d<\/p>\n
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.<\/p>\n
2. When are closing costs paid in a real estate transaction?<\/p>\n
\u201cClosing costs are typically paid at the closing of a real estate transaction,\u201d says Duncan. \u201cThe 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.\u201d<\/p>\n
3. What are some common closing costs that people should save for?<\/p>\n
\u201cIn addition to ongoing costs like mortgage payments, property taxes, maintenance and utilities, it\u2019s important to understand all upfront costs over and above your down payment,\u201d explains Duncan. \u201cIt\u2019s 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.\u201d<\/p>\n
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\u2019s share of costs according to Mamourian. \u201cIf you\u2019re 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.\u201d<\/p>\n
Homebuyers should also be aware of any pre-payments by the seller that may need to be reimbursed. \u201cSometimes homeowners pay for all their property taxes up front for the year so if you move in half way through the year you\u2019d have to reimburse the seller for that amount,\u201d says Mamourian.<\/p>\n
4. What are some unexpected costs that homebuyers could face?<\/p>\n
Unexpected or hidden costs are always a concern for new homeowners so it\u2019s important to plan ahead and build a buffer into your budget. \u201cAs 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,\u201d suggests Duncan. \u201cThis 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.\u201d<\/p>\n
In rare instances a special assessment may be required in a condominium when a major repair is needed that surpasses the condo\u2019s collective reserve fund. \u201cSpecial assessments only happen if something has either gone wrong or if the reserve fund isn\u2019t able to handle a capital expense that the board and residents approve,\u201d says Mamourian. \u201cIf this comes into play at closing, it\u2019s not a surprise and the buyer signs up for it.\u201d<\/p>\n
When it comes to homeownership, it\u2019s a good idea to prepare for unexpected repairs or maintenance items. \u201cDon\u2019t ever expect to buy a house and have zero expenses,\u201d says Mamourian. \u201cThat\u2019s the thing about houses versus condos \u2014 most people have this misconception that condo fees are just wasted money but when in reality it\u2019s just a fixed, predictable maintenance cost whereas in a house that annual cost is variable.\u201d<\/p>\n
5. Can homebuyers roll their closing costs into the mortgage loan?<\/p>\n
\u201cThe only closing cost that can be rolled into a mortgage is your CMHC insurance premium,\u201d says Mamourian. \u201cCMHC premiums are payable only by those who are putting down less than 20 percent of the purchase price in cash as a down payment.\u201d<\/p>\n
\u201cHomebuyers can always consider reducing their down payment to help cover closing costs however, they\u2019ll end up with a larger mortgage,\u201d adds Duncan.<\/p>\n
6. Do closing costs differ by location?<\/p>\n
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. \u201cThe 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,\u201d says Mamourian.<\/p>\n
7. Can homebuyers negotiate with sellers to pay the closing costs?<\/p>\n
Homebuyers can always try to negotiate on closing costs, but it depends on the market. \u201cIn a seller\u2019s market, you can\u2019t be making demands like this,\u201d says Mamourian. \u201cIn a buyer\u2019s market, it\u2019s open season, but rather than asking to pay closing costs like you see on TV, it\u2019s usually just built into the offer price and still paid by the buyer.\u201d<\/p>\n
8. What are some tips for how homebuyers can potentially reduce their closing costs?<\/p>\n
\u201cThe total cost associated with items you\u2019ll need during closing can range, depending on location and who you work with to do the close,\u201d says Duncan. \u201cFor 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\u2019s a good idea to contact different firms and ask for quotes.\u201d<\/p>\n
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.<\/p>\n
9. Is there anything else that homebuyers should be aware of when purchasing a home?<\/p>\n
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.<\/p>\n
\u201cCalculate how much you spend each month on everything \u2014 rent, groceries, insurance, loans, taxes, entertainment, etc. \u2014 to determine what you can comfortably afford altogether and take advantage of helpful tools like TD\u2019s Mortgage Affordability Calculator,\u201d says Duncan. \u201cFrom 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.\u201d<\/p>\n