(Fifteen-minute read time)

A mortgage is an excellent tool to help Canadians reach their financial goals. Whether you’re considering buying a home, investing in real estate, starting a major renovation, or using some of your equity, getting a mortgage is often the best way to access the funds you need. You won’t be surprised that I’ve never heard someone say, “I would really love to have a mortgage.” Instead, people usually look for a way to accomplish something else, like the dream of home ownership or building wealth through real estate. Ultimately, most of us aim to pay off our mortgage as soon as we can, for a good reason. The reason we want to pay off our mortgage is because of the cost. Every mortgage has costs, and sometimes the nature of these costs is unclear or not explained very well. Let’s dive into the costs of a mortgage in Ontario.

Quick Summary of How Much A Mortgage Costs

While every application is different, this is a good estimate of the most common mortgage costs that you’ll face when we work together. Unique properties or situations could be more or less.

• Mortgage Closing Costs (usually paid at closing through your lawyer)

  • Land Transfer Tax: Approx 1-2%, but first-time buyers get a rebate

  • Home Inspection (usually optional if you want one): $400-$600

  • Appraisal (if the lender requires it): $300-$600

  • Legal Fee (you always need a lawyer): $1200-$1900

  • Lender Fee (only about 15-20% of cases): typically 1% of the mortgage amount

  • Broker Fee: $0. I don’t charge anything 99% of the time.

• Mortgage Interest Costs (built into your mortgage payment)

  • Fixed Rate Interest Costs: A set amount of interest that doesn’t change

  • Variable Rate Interest Costs: Your payment or your amortization will change

• Mortgage Discharge and Penalty (paid at the end of your mortgage)

  • Discharge (lender’s charge to close the mortgage): $300-$400

  • Prepayment penalty (if you break your mortgage early): At least 3 months of interest

You can get more details on these below or use the book a call button and set up a free consult to chat for free with an Ontario licensed mortgage broker. We do not charge for advice, and you do not need to sign anything or provide sensitive information.

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What Are All the Costs of a Mortgage?

Your mortgage in Ontario has 3 main kinds of costs:

• Mortgage Closing Costs: These are the costs you pay when you start a mortgage. Appraisal Fees, Legal Fees, Home Inspection Fees, Land Transfer Tax, and Lender Fees are all part of closing costs.

• Mortgage Interest Costs: This is the cost of borrowing the money for the mortgage. Also known as your mortgage rate. By far, this is usually the largest type of cost in a mortgage. It can be calculated differently between banks, so it’s worth it to understand how your interest will be charged. More on that below

• Mortgage Discharge and Penalty Costs: These costs occur at the end of a mortgage. Often they are the most overlooked, and unfortunately, they can sometimes be a surprise. It’s critical that you know your potential penalty before you sign for a mortgage. The costs can be in the tens of thousands of dollars, or you might be trapped in the wrong mortgage for years.

You usually do not have to pay all of these in your specific case, but it’s possible that you will. We’ll get into more detail about this later.

Mortgage Closing Costs

Closing costs are important to know about in advance so that you can plan ahead. If you have a good understanding of your closing costs, then you can be prepared to decide if this mortgage is right for you. Imagine getting approved for a mortgage, but your bank doesn’t fully explain closing costs. You might find yourself scrambling to find hundreds or thousands of dollars, or you might have to reduce your down payment. This is not how to start your mortgage off on the right foot. When you apply for a mortgage, your mortgage broker or bank should explain all the closing costs in detail before you sign any commitments.

Mortgage Appraisal Fees

When you get a mortgage on a property you’re purchasing or on a property you already own, the lender (or bank) will need to be confident that the property is worth enough money so they can be comfortable lending to you. We can’t expect a mortgage of $800,000 when the property is only worth $600,000. To confirm the value, the lender will often request an appraisal.

An appraisal can only be done by a licensed appraiser, and each lender has a list of appraisal companies they trust. You don’t always have the opportunity to choose your own appraiser, and you are also not technically entitled to a copy of the report. Most people find it frustrating that the lender doesn’t like to share the report, especially if the homeowner paid for it. Trust me, I know how you feel.

If your lender requires an appraisal, then we will arrange with an approved appraisal company for someone to do the report for us. The appraiser may or may not need to visit the property, but they usually conduct the appraisal in person.

The appraisal is usually the first cost you’ll see, and you can expect to pay $300-$600 for most properties. The appraisal cost goes up when:

• The property is in a remote location

• The property is difficult to access (winter cottage, islands, terrain)

• The property is much larger than average (estate homes)

• The property has outbuildings like a workshop or detached garage in some cases.

• The appraisal market is busy – if appraisers are very busy, then they’ll often charge more

If we work together, I can often secure an appraisal rebate which can save you hundreds of dollars. Mention this article, and I’ll guarantee you an appraisal rebate of $300 once your mortgage closes!

Legal Fees for a Mortgage

Every mortgage needs to be legally registered with the local authorities, and only a lawyer can handle this part of the transaction for you. In addition, you should expect your lawyer to look out for your best interests and facilitate the transaction as smoothly as possible.

Your lawyer usually takes care of the following:

• Meeting with you to review the details of your mortgage commitment

• Collecting your down payment

• Accepting the mortgage funds from your lender and transferring them to your seller, or whoever is meant to receive the proceeds of your mortgage

• Confirming your identity to protect you against fraud

• Doing a title search for your protection

• Providing title insurance if your lender requires it or if you purchase it

• Taking care of any requirements that the mortgage lender might have, like paying out debt or verifying that you do or don’t own some other property.

Your lawyer will probably have a set fee for a real estate purchase. Some extra costs may be needed depending on the circumstances. Plan for $1200 to $1900, but prices vary.

Usually, you’ll find a lawyer who is local to your area. Still, there are many great options across Ontario that specialize in real estate and offer a variety of legal services. If you’re looking for help picking the right lawyer, just let me know when we do the application, and I would be happy to provide a few suggestions. I do not collect any financial benefits from lawyers that I recommend.

Home Inspection Fees

When you’re buying a property, you might want to have a professional conduct a thorough inspection of the most critical components of the property. Rarely your mortgage lender will require this. In many cases, an inspection will be one of the conditions on your offer. It’s never a bad idea to have an inspection, but you will have to decide if it makes sense in your case. Your realtor should be able to give you more background and some thoughtful advice on inspections. Whether you want to protect yourself with a home inspection is ultimately your choice.

Choose an inspector who is familiar with your local area and offers the right level of service and attention to detail to give you the peace of mind you need. The cost for an inspection will vary but expect to pay between $400-$600 in Ontario for a home inspection.

I’m happy to provide a few options for home inspectors I have personally used or trust. If I don’t have anyone in your area, I will be transparent about this. I also do not collect any financial benefit from any of the Inspectors.

Land Transfer Tax

In Ontario, every person who buys property needs to pay Land Transfer Tax. There is no land transfer tax if you are refinancing your mortgage, and there is no land transfer tax if you gift a property to someone.

If you are a qualifying first-time homebuyer, you can receive a Land Transfer Tax rebate. First-time buyers can save up to $4000 in Land Transfer Tax through a rebate that happens with your lawyer. The rebate is applied immediately at the lawyer’s office so that you don’t need to wait for any funds to come back to you.

On the other hand, purchasers in the city of Toronto will be required to pay two land transfer tax amounts. One tax is paid to the province of Ontario, and the other is paid to the city of Toronto. People buying in Toronto will pay double the amount of land transfer tax vs the rest of Ontario.

The tax amount follows this schedule for most of Ontario and is double for the city of Toronto. First-time buyers get only one rebate.

• amounts up to and including $55,000: 0.5%

• amounts exceeding $55,000, up to and including $250,000: 1.0%

• amounts exceeding $250,000, up to and including $400,000: 1.5%

• amounts exceeding $400,000: 2.0%

• amounts exceeding $2,000,000, where the land contains one or two single-family residences: 2.5%.

Lender Fees

A lender fee is a one-time cost that is added to your mortgage at the time of closing. For a small number of mortgage applications, the lender will charge a lender fee in addition to the regular interest payments. The lender fee is applied whenever the application doesn’t meet the standard guidelines, and the mortgage requires some extra flexibility to make the application work.

Most of the time, a lender fee is applied in cases where the application needs one or more of the following:

• Flexibility on documentation for business owners whose tax return doesn’t reflect their true income

• Flexibility to increase the amount of the mortgage beyond what the usual guidelines allow

• Flexibility for borrowers who have gone through a significant credit event that might make it harder to get approved traditionally

• Flexibility for borrowers who have unique sources of income that aren’t documented fully on their tax returns

• Flexibility for investors who have other multiple investment properties and the standard programs don’t fit.

It is worth emphasizing that a lender fee is still uncommon. Still, it is a growing trend for a number of special circumstances. It may be a way to help reach your unique goals more quickly than traditionally was possible. You should only consider a mortgage with a fee when it is the best option available and when we’ve discussed our plan to transition back to a traditional mortgage.

The most common lender fee is 1% of the mortgage amount. The fee is sometimes paid at closing, and sometimes it can be added to the mortgage amount and paid off over time.

Mortgage Scenario: Chris is a successful business owner who operates a construction company. The company is growing and cash flow is strong, but for tax purposes, they only pay themselves a dividend and no salary. Last year, the dividend Chris took was smaller so that he could keep more money inside the company. They purchase a home for $900,000 with a $180,000 (20%) down payment and a mortgage of $720,000. The lender requires a lender fee of 1% of the mortgage and charges them $7,200 at closing as a one-time fee because the dividend income alone does not show the total picture.

Broker Fees

A broker fee is quite rare and is reserved only for specific scenarios. Some brokers will charge a fee for their advice or when the lender does not provide enough compensation for their efforts to help secure a mortgage. Your broker might suggest private lending if your application doesn’t fit the traditional or alternative guidelines. Sometimes it makes a lot of sense for people to work with a private lender. Still, you should be careful and ensure you fully understand the circumstances and costs of private lending. As a rule, none of the lenders I work with regularly will require a broker fee.

Closing Costs are often misunderstood. As your mortgage broker, I am required by law to disclose the mandatory closing costs to you in writing.

If You Aren’t Sure About Closing Costs or if You Have Questions About the Offer from Another Lender, Just Ask!

Set up a call with a licensed mortgage broker today. I’ll never ask you to sign a contract or charge you for a consultation.

Mortgage Interest Costs

Your mortgage rate is like the sticker price on a vehicle. It’s the first thing everyone looks at. The rate is usually the biggest of all the mortgage costs. It’s essential to understand your mortgage rate so that you know how much interest you are paying every time you make a payment.

With that in mind, it can be risky to focus solely on the mortgage rate above everything else. Working with a mortgage broker is the best way to compare different mortgage rate options easily. We have access to more than 50 different lenders, and in most cases, there are only one or two that are perfect for you. When comparing rates, look at the big picture by figuring out the monthly cost or savings of a different rate. Compare that cost or savings with the other components of the mortgage (fees, penalties, customer service, promotions, cash back, etc.) so that you can make the right decision. This is where the right advice can make a world of difference.

Mortgage Scenario: Chris is researching mortgage rates and finds dozens of options that all look the same. Knowing that he’ll probably need a mortgage of $500,000, he takes note of the following two offers:

1. Mortgage A: 5-year term on a full-featured fixed-rate mortgage at 5.09%

2. Mortgage B: 5-year term on a no-frills fixed-rate mortgage at 4.99%

At first, it’s clear to Chris that he can save money by taking the lower rate option. They both appear similar, except one is 0.1% lower than the other. He calculates that he can save $8,553 over 5 years with the no-frills option.

After reading through the details with his broker, Chris finds that the no-frills option does not allow you to make extra payments. Chris usually gets a bonus from work each year, and he always planned to pay down the mortgage faster with his bonuses. The no-frills option charges a penalty if he wants to make extra payments, and the cost of those penalties adds up to $16,000. In the long run, Chris is better off with the higher rate.

Free Checklist: Compare Two Mortgage Rates by Asking the Following for Each:

• How much can I prepay each year without penalty? If I do prepay more, what is the penalty?

• Does the lender include a “bonafide sale” clause? This means you cannot end the mortgage early the mortgage unless you sell, under any circumstances

• Does the lender offer an online portal where you can get important mortgage information or contact them for things like payment frequency changes, statements, prepayment options, and other convenient features or do you need to call and wait on hold?

• Is the mortgage portable? (meaning you can take it with you)

• Is the mortgage assumable? (meaning someone else can take it over)

• Does the mortgage have the option to add a line of credit later?

• Does the lender charge for statements or other paperwork if I need it?

• Does the lender allow me to “float down” my rate if something changes before closing?

• Does the lender allow my broker to take care of administrative questions for me, or do I have to do it myself?

Not all of these will be important for everyone, but if you only focus on the sticker price (interest rate), then you may end up with a mortgage that resembles a premium-fuel sports car when you wanted a reliable family car (or vice-versa!).

In general, variable rates expose you to more risk that your payment will go up or that you will take longer to pay off your mortgage. Often you have a lower payment on a variable mortgage. Still, you must be aware of the chance of a fluctuating payment which could put pressure on your personal finances.

On the other hand, fixed rates give you a guarantee that the payment will not change for the length of your term. A fixed-rate mortgage represents a bigger commitment between you and the lender. They promise not to change the rate, and you promise not to pay off the mortgage early (subject to some rules). There is a trade-off between flexibility and risk. You should seek professional advice and then make the decision that fits your personal risk tolerance and financial circumstances.

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Costs at the End of a Mortgage

Many of us don’t know that there can be costs at the end of a mortgage. The excitement and flood of information can make it seem like the end of your mortgage is the last thing to worry about when you’re going through the approval process. Be ready to make the right decision by understanding the ‘exit costs’ just as much as you understand the ‘entry costs.

Discharge Fee

When your lawyer registers the mortgage, the lender has a legal claim on your property. This is meant to protect the lender and give them security in exchange for lending you all the mortgage funds. At the end of your mortgage, the lender has to remove themselves, or Discharge, their interest in your property. The Discharge allows you to move to a different lender or to be completely mortgage-free. It’s usually not more than $300-$400, but it’s worth knowing that you will be expected to pay this one day when your relationship with that lender comes to an end. You don’t pay a discharge if you renew your mortgage with the same lender, since they don’t need to release their interest in your property.

Prepayment Penalty Costs

Whenever you agree to a mortgage offer, the lender will have rules about how you can end the mortgage early if you want to. Did you know that more than half of the mortgages in Canada will be ended early by the borrower?

You could face a prepayment penalty if, before your term ends, you:

• Sell the house (for any reason)

• Switch to another lender (for any reason including a better rate)

• Refinance to reduce your payment

• Take out equity from the property

The penalty for breaking a variable or adjustable rate mortgage is limited to 3 months of interest. It’s a simple calculation where you multiply the current balance by your rate and divide it by 4.

Example: Mortgage of $500,000 and rate of 4%. Your penalty is (500,000 x 0.04 x 0.25) = $5,000. You’ll pay a discharge fee in addition to this prepayment charge.

The penalty for breaking a fixed-rate mortgage is much more complicated in some cases. Pay close attention to how this is explained when you get the mortgage. Many banks use complex calculations that inflate the penalty and can cost you thousands more than it should. If you want to calculate your prepayment penalty, most banks have a web-based calculator for this. Just search for it online.

As a rough estimate, you could pay 3-4% of your mortgage balance as a penalty when you have a fixed-rate mortgage. In our same example of a $500,000 mortgage and a 4% rate, the penalty for breaking this mortgage could be upwards of $20,000. The 3-4% estimate is only an estimate, and the penalty for a fixed mortgage will decrease as you approach the end of the term. Suppose you sign up for a 5-year term and you get promoted or relocated at work after 2 years. You may need to sell the house unexpectedly and face a massive penalty. This is not to say that fixed-rate mortgages are a poor choice. It’s important to understand the costs so that you can make the choice that fits your risk tolerance, lifestyle, and financial circumstances.

Final Thoughts on Mortgage Costs

A mortgage is a great tool to help you reach your personal and financial goals. Plan ahead and get help from a licensed mortgage agent/broker who can help ensure you get the right financing solution. Also, our needs will change over time, so don’t assume that you should keep going for the same type of mortgage at each renewal period. Continually assess your situation, and don’t jump into any contract until you are comfortable with the terms. As a rough estimate, expect you to set aside about 1.5% of your purchase price for closing costs, plus your down payment. You should never pay a fee unless it’s the best option for you, and you should always consider a couple of options before you decide.

Did you enjoy this article? Do you have a question about mortgage costs that I didn’t answer here? Book a video chat or phone call at a time that fits your schedule, and get the answers that you need to make great financial decisions in Ontario.

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