The Real Cost of Home Ownership: Know Your Closing Costs

The Real Cost of Home Ownership: Know Your Closing Costs

Do you know the real cost of home ownership? A lot of first-time homebuyers are surprised to learn there are closing costs beyond just the down payment and home inspection.

Be Clear About The Closing Costs

It’s important to know your closing costs. Being caught off guard can leave you scrambling at the last minute. Not only could the deal fall through on your dream home, you could also get sued – yikes!

How much should you set aside for closing costs? Excellent question! A good rule of thumb is to budget up to 4 percent for closing costs. For example, if you’re buying a home for $500,000, you should budget $20,000 for closing costs. As you can see, closing costs can be quite costly. Here are some examples of the most common closing costs buyers face.


When you find a home you’re interested in, you’ll have to make a payment in the form of a deposit. A deposit shows the seller you’re serious about buying the property. Although there isn’t a specific requirement about the size of the deposit, it’s fairly common for buyers to make a deposit of 5 percent of the desired purchase price. A word of caution: a deposit that’s too low can make sellers think twice about accepting your offer.

Home Inspection

For most buyers, buying a home will be the single largest financial transaction of their lifetime. As such, you’ll want to make sure you’re buying a rock-solid investment, not a lemon. A home inspection is money well spent. A home inspector will inspect everything from the plumbing to the wiring and in between. At the end of the inspection, you should receive a written report detailing the quality of the home. Although home inspection fees vary, consider budgeting $500.

Down Payment

Not to be confused with your deposit, your down payment is a lump sum payment made on closing. Once your offer has been accepted and all conditions have been met, the down payment is made. The down payment is paid directly to the seller’s real estate lawyer on closing day via escrow. The minimum down payment in Canada is 5 percent of the purchase price.

Mortgage Default Insurance

Common referred to as CMHC insurance, mortgage default insurance protects the mortgage lender if you fail to repay your mortgage in full. Unlike home insurance, not everyone needs to purchase mortgage default insurance. If you make a down payment of at least 20 percent, you can avoid it. However, if you make a down payment between 5 percent and 20 percent, you’ll have to  pay CMHC insurance. 

Although mortgage default insurance can be paid up front in a lump sum, most buyers choose to  amortize it over the life of their mortgage, paying the premiums along with their regular mortgage payments. The lower your loan-to-value ratio,  the higher your CMHC insurance premiums. Visit the CMHC website for a table of the mortgage default insurance premiums you’ll have to pay.

Land Transfer Tax

When purchasing a home, one of the most costly closing costs is land transfer tax. Each province has its own land transfer tax. If you’re buying in Toronto, not only do you have to pay a provincial land transfer tax, you also have to pay a municipal land transfer tax. Although the formula for calculating land transfer tax varies by province, it’s usually based on the purchase price of your home.

Real Estate Lawyer Fees

Your real estate lawyer plays a vital role to ensure your home buying experience goes smoothly. Your lawyer will look out for your best legal interests when purchasing a home. He will ensure your home’s title is free from any defects. He will also calculate your land transfer tax and pay your down payment to the seller’s lawyer. Although legal fees vary based on a number of factors including the experience of the lawyer and the purchase price of the home, $1,500 is a good amount to set aside.