Can you Include Closing Costs as Part of your Mortgage?

Can you Include Closing Costs as Part of your Mortgage?

One of the biggest surprises I experienced as a first-time homebuyer were the closing costs. After I shelled out $300 for a home inspection, I thought that was it. Nope. Real estate lawyer fees, appraisal fees, title insurance and the real doozy, land transfer tax (a double one if you’re buying in Toronto) soon followed. Pretty soon I’d spent a few thousands dollars on closing costs…

Luckily for me, my real estate agent had advised me about closing costs ahead of time, but many homebuyers aren’t so lucky.

Many refer to closing costs as the “hidden costs of real estate”, with good reason. They can sneak up on you if you’re not careful. And, unless you enjoy being blindsided by thousands of dollars’ worth of extra expenses at the last minute, it’s important to plan for them ahead of time.

What are closing costs?

Closing costs and disbursements are the fees you need to pay to close a real estate deal. Closing costs are administrative and legal costs, such as land transfer tax, lawyer fees, title insurance and appraisal fees. Disbursements, on the other hand, are paid directly to your notary or lawyer for so-called out-of-pocket expenses, like photocopying, registrations and searches.

Now you know what closing costs are, let’s look at how much they can cost you. For the typical home, you’ll pay 1.5% to 4% of a home’s purchase price towards closing costs. That’s a lot of dough. And, if you’re only putting down the minimum 5% (on homes under $500,000), closing costs can be almost as much as your down payment.

Let’s say you’re buying a $500,000 home. That means you should put aside at least $20,000 (4%  of the purchase price) to cover closing costs.

If you’re a first-time homebuyer,  the government cuts you some slack. Depending on where you’re buying, you may catch a break on the provincial land transfer tax in the form of a rebate. Your real estate lawyer can help you take advantage.

Common closing costs homebuyers face

Buying a home? Here are three of the most common closing costs you’ll face. These closing costs are for a resale home, although you’ll meet some of them when buying a new home.

Home inspection:

Although not required, we highly recommend organising a home inspection. Buying a home most likely represents the single biggest financial transaction of your lifetime. For that reason, you want to make sure you’re putting your hard-earned money towards a good long-term investment, not a money pit. Be sure to hire a certified home inspector and be present at your home inspection. It’s a good opportunity to learn about the inner workings of your home.

Real estate lawyer:

Hiring an experienced real estate lawyer in a real estate transaction is a must. And not just any lawyer. A lawyer that specialises in real estate. A lawyer does all the important work behind the scenes to make sure you fulfil your legal home-buying requirements. They review the offer, make sure the title doesn’t have any defects or liens, buy title insurance, register the home in your name, prepare the statement of adjustments and give you the keys to your new home.

Land transfer tax:

Land transfer tax is another costly closing cost (the most costly in many instances). It’s the government’s way of reaching into your pockets when buying a property. Like it or not, there’s no way to avoid land transfer tax. Although you may be able to negotiate if you’re a first-time homebuyer. Your real estate lawyer calculates your land transfer tax and any rebates you’re entitled to.

Now that we know what closing costs are, let’s look at whether they can be included as part of your mortgage

Can you include the closing costs in your mortgage?

If you’re buying a property in a big city like Toronto or Vancouver, it can be tough to come up with the down payment. You may only be able to afford to make the minimum 5% down payment. Then you have to pay the closing costs on top of that – or do you?

There are some instances where closing costs can be included as part of your mortgage. For example, if you’re borrowing your down payment under a flex down mortgage, you can borrow your closing cost funds, although they must be debt serviced as part of the Total Debt Service (TDS) ratio. The higher TDS ratio can result in a lower maximum purchase price.

Is it a good idea? It depends. Although you’ll pay higher mortgage payments with your closing costs rolled into your mortgage and more interest overall, if you’re buying in a pricey real estate market where home prices are rising faster than you can save, it may make sense. Be sure to factor in the additional interest you’ll pay over the life of your mortgage to make sure it works.

There are also cashback mortgages. With this mortgage, although your closing costs aren’t rolled into the mortgage, in exchange for a higher mortgage rate, you’ll get cashback upon closing. This cashback is often used to  cover closing costs.