Can You Roll Closing Costs Into Your Mortgage?

Having enough for the down payment does not necessarily mean you have enough cash to complete a home purchase. Buyers can also face legal fees, property tax adjustments, title insurance and other expenses before the sale is completed.

Most closing costs cannot simply be added to a standard purchase mortgage in Canada. You should generally plan to pay them separately. An important exception is the mortgage loan insurance premium, which can usually be added to an insured mortgage, although applicable provincial sales tax on that premium cannot be financed.

Why Most Closing Costs Are Separate From Your Mortgage

Your mortgage primarily finances the home purchase. Closing costs are separate expenses required to complete the transaction. The federal guidance on budgeting for a home purchase identifies legal fees, property tax adjustments, home inspections and title insurance among the costs buyers may face in addition to the mortgage. It recommends preparing for closing costs equal to roughly 1.5% to 4% of the purchase price.

That distinction is important when planning your available cash. A $500,000 purchase, for example, could call for a closing-cost budget of roughly $7,500 to $20,000 using that general range. The actual total depends on the property, location and expenses that apply to the transaction.

The individual expenses that can make up that amount are covered in more detail when looking at mortgage closing costs in Canada.

Mortgage Loan Insurance Premiums Are Different

Mortgage loan insurance creates a notable exception to the general separation between the mortgage and closing expenses.

When mortgage loan insurance is required, the insurer charges a premium based on factors including the mortgage amount and loan-to-value ratio. The premium can be paid separately or added to the mortgage balance. Adding a mortgage loan insurance premium to the mortgage means you do not need to pay that premium entirely from your available cash at purchase.

Financing it increases the amount you owe, however. A $20,000 premium added to the mortgage becomes another $20,000 of mortgage principal on which interest can accrue.

This option is particularly relevant to a closed high-ratio mortgage because a down payment below 20% generally requires mortgage loan insurance.

Provincial Sales Tax on the Insurance Premium Cannot Be Added

Financing the mortgage loan insurance premium does not necessarily eliminate every related upfront expense.

Ontario, Quebec and Saskatchewan currently apply provincial sales tax to mortgage loan insurance premiums. CMHC specifies that this sales tax cannot be added to the insured loan amount. The current CMHC premium rules therefore distinguish between financing the insurance premium itself and financing the provincial tax charged on it.

A buyer in one of those provinces needs to account for that tax separately rather than assuming the entire insurance-related cost will disappear into the mortgage balance.

Can You Borrow the Money for Other Closing Costs?

Using a separate source of borrowed money is different from rolling a cost into the mortgage itself. A buyer might consider a personal loan or line of credit, but taking on additional debt can affect mortgage qualification because lenders consider existing debt obligations when assessing affordability.

For CMHC-insured financing, total debt service calculations include payments on other debts, and CMHC currently uses a maximum Total Debt Service ratio of 44% for its homeowner mortgage loan insurance requirements.

Borrowing the missing cash shortly before closing can therefore create a financing problem rather than solve one. A new debt obligation can change the financial information on which the mortgage approval was based.

Do You Need to Show That You Have Money for Closing Costs?

Closing costs should be included in your available-cash planning rather than treated as an expense to solve after the mortgage has been arranged.

CMHC’s insured-mortgage requirements specifically tell borrowers to account for closing costs such as legal fees, land transfer fees and adjustments, using an estimated range of 1.5% to 4% of the purchase price.

That makes the cash requirement broader than the down payment alone. The exact amount you need will depend on your transaction, so an early percentage estimate should eventually be replaced with actual figures from your lawyer or notary and other professionals involved in the purchase.

Plan for Closing Costs Before Choosing the Size of Your Down Payment

Putting every available dollar into the down payment can leave you short of cash when the transaction reaches completion. A better home-buying budget separates the down payment from expenses that must be settled outside the mortgage.

As closing approaches, obtain the actual amounts rather than continuing to rely on a percentage estimate. Your lawyer or notary can identify transaction-specific legal charges and adjustments, while your lender can confirm which mortgage-related amounts are being financed.

Keeping those funds available also makes mortgage closing day easier to prepare for because you already know which amounts must come from you rather than from the mortgage advance.

Questions About Rolling Closing Costs Into a Mortgage

Can legal fees be added to a mortgage?

Do not assume they can. Legal fees are normally treated as a separate home-buying expense, so include them in the cash you set aside for closing unless your lender has expressly approved a financing arrangement that covers them.

Can land transfer tax be rolled into the mortgage?

Land transfer or property transfer taxes are jurisdiction-specific closing expenses and should generally be budgeted separately rather than assumed to form part of the purchase mortgage.

Does adding the mortgage insurance premium reduce your down payment?

It does not replace the required down payment. The premium is calculated after the mortgage amount and applicable loan-to-value position have been established, then it may be added to the insured loan amount.