The First-Time Property Buyers’ Guide, Part 3: Closing Costs

Welcome back for part three of our first-time buyers’ guide! If you haven’t yet caught up on part one and two, you can find them here and here.

Today, we’ll be covering closing costs – what they are, why they’re so important, and why a lot of people forget about them. Closing costs are the fees you pay in addition to your down payment to finalize the purchase of a property.

There are five components to them, and they happen at different parts of the transaction.

The inspection

The inspection is a critical part of evaluating a home’s condition. This is where we bring in a certified inspector, or an architect, to verify the property and tell us what’s happening “under the hood.”

They will usually come in with different tools, such as a moisture meters or infrared camera, to get a better understanding of the home’s structure. How is the electrical work? Is the plumbing in good shape? What are we actually getting ourselves into?

It’s important to note this is a visual inspection, so they can’t start drilling holes in the walls to see below the surface. But it still gives us a pretty good understanding of what the property is like and what we may have to deal with in the next couple of years.

Inspections are going to cost you anywhere from $500 to $1200, but the amounts will vary based on the type of property. Condos are usually going to be about $500, a single family home might be $800 to $900 (unless it’s really big), and for a plex, you’ll start hitting that $1,200 mark because it requires more of the inspector’s time.

An inspection usually takes anywhere from one to three hours. Then, the inspector prepares a report – anywhere from 30 to 80 pages long – that you will be able to review. It will include photos of anything that was noteworthy on the day of the inspection.

With that report in hand, you will have three options:

  • Move forward with the purchase, since everything looks good
  • Renegotiate the price or ask the seller to fix certain issues, if there are more problems than you expected
  • Cancel the offer because there are too many issues with the property

The notary

Your notary is the person who’s in charge of the legal side of the transaction. They’re going to take care of processing the actual sale. This includes registering at the public registry and making sure the property you’re buying is completely debt-free – i.e. that all previous mortgages, credit lines, liens, etc., are paid off.

They’re also going to make sure the person selling you the property is actually allowed

to do so. This may sound trivial, but sometimes, people don’t do their due diligence when preparing a home, and that leads to problems down the road.

This typically happens when you have a liquidator – somebody who is selling a property on behalf of somebody else – and you want to make sure they have all the necessary rights. This is going to cost you anywhere from $1,500 to $2,500.

The spread really depends on the size of the office that you hire, as well as if you’re doing a mortgage with a Big Six bank or a virtual lender. If you go to a virtual lender, there is no actual bank, so the notary has to do a lot of the paperwork on their behalf. In doing so, they’re going to charge you more money for their work.

The adjustments

These are adjustments for prepaid expenses or income. On a home, the most common adjustments are your municipal tax and your school tax.

Those are typically prepaid twice a year, and depending on your closing date, you’re going to adjust for what was prepaid by the seller (or what the seller hasn’t paid yet but was still responsible for).

Other things that are adjusted include rental incomes. Let’s say you’re buying a multiplex where rent is always collected on the first day of the month. Assume you buy the property on the 15th of the month – you’re going to collect half the month’s rent in the adjustments.

Sometimes, oil is also an adjustment. If you have oil heating for the property and there’s still a full tank, there will be an adjustment for how much that costs.

The CMHC tax

In part two of this series, we came up with an example in which $13,950 was your mortgage interest amount. As a quick reminder, the example included a $500,000 home with 10% down, which left us with a 3.1% interest tax on the remaining $450,000 mortgage.

In Quebec, whenever you take out an insurance policy, there is a 9% tax that is added on to this. So, based on our previous example, you’re going to have a tax of $1,255.

The welcome tax

Welcome tax is also known as land transfer tax. It’s a very common tax all over the world, and it’s based on either the sale price or the municipal valuation (whichever is higher).

95% of the time, the sale price is higher. The tax itself is calculated using a sliding scale:  the more expensive the property, the more tax you’ll be paying.

It kind of works like a luxury system in Montreal. Going back to the $500,000 example, you’ll be paying $6,000 in welcome tax.

So, if we start doing a little bit of math here and adding these things up, we have… 

$1,200 for the inspection.

$2,500 for the notary.

$3,000 for the adjustments.

$1,255 for the CMHC.

And $6,000 for the welcome tax.

That’s about $13,000 in total.

It’s really important to have this money set aside, because these expenses are going to be coming your way and you need to be prepared.

Have more questions about buying a home for the first time? We have answers! Reach out to our team for a chat about all things real estate.

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