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What are closing costs and why do you need to ensure that you have the money?

You’ve picked out the home of your dreams, your offer has been accepted, and your mortgage has been approved – but why did your mortgage broker ask you for bank documentation to confirm closing costs, and what are the closing costs associated with purchasing a home in Alberta?

All lenders want to ensure that every borrower has saved enough money in order to pay for their lawyer, title insurance, property tax adjustments and disbursements associated with buying a home. The following are a few (but not limited to) of the closing costs that you can expect when purchasing a home:

Legal fees:

Legal fees differ from one law firm to another, and as such it does not hurt to shop around. In the past we have seen legal fees range from $450.00 – $2,500.00 plus disbursements (cost of registration, office supplies, couriers etc.) plus GST. Legal fees are not covered by the mortgage being funded and should be saved prior to putting in an offer on a home.

Title Insurance:

As mentioned by Robert McLaughlin on the May 22, 2018 blog post, title insurance is an important aspect of a home purchase, and in many cases, purchasing a policy of title insurance is made mandatory by the lender. There are many factors that dictate the cost of the title insurance policy, such as purchase price and location of the property. A quote can be obtained by your lawyer or through the various title insurer’s websites. There are some cases where the cost of title insurance forms a part of the funded mortgage, or in some cases needs to be paid as part of disbursements at a law firm.

Property Tax Adjustments:

Property tax adjustments are added to the Statement of Adjustments which will factor into the Cash to Close and is your responsibility to pay.

Property taxes are adjusted accordingly on a case by case scenario:

Scenario 1:

If the seller of the property paid on a month to month basis:

-Property taxes are $1,200.00 per year and the seller pays $100.00 on a month to month basis
-Closing date is September 15, 2018
-Assuming the seller paid for September’s property taxes on September 1, 2018
-There are 15 days in the month of September that the buyer is responsible for

Sample calculation:

$100.00/30 days in September = $3.33 per day
$3.33/ day x 15 days = $49.95

As such $49.95 of September’s property taxes is the buyer’s responsibility

Scenario 2:

If the seller of the property pays on an annual basis:

-Property taxes are $5,000.00 per year (January 2018-December 2018), due on June 30, 2018 for the entire year
-Closing date is September 15, 2018
-Assuming seller has paid for the property taxes In full on June 30, 2018 the buyer is responsible for 107 days (September 16, 2018 – December 31, 2018) of the year

Sample calculation:

$5,000.00/365 days = $13.70 per day
$13.70 x 107 days that the buyer is responsible for = $1,465.90

As such, $1,465.90 is credited back to the seller of the home.

Please note that the above scenarios are for examples only, and there are many other scenarios that can take place, and your lawyer will go through these adjustments with you in detail. It is best practice to always be financially prepared before entering into a binding contact to purchase a home. Using a licensed mortgage broker can help ease the learning curve.