When buying property, the sticker price of the house is just one part of the total cost. "Closing costs" are the additional fees and expenses that buyers (and sometimes sellers) incur to complete the real estate transaction and legally transfer ownership. These costs can add up to a significant amount, often between 5% and 10% of the property's value in Sri Lanka, depending on the specifics of the transaction.
Understanding these costs upfront is crucial for budgeting and avoiding unpleasant surprises. Here's a breakdown of common closing costs in Sri Lanka:
I. Major Closing Costs for the Buyer in Sri Lanka
Stamp Duty (Largest Component):
What it is: This is a tax imposed by the government on the legal document (Deed of Transfer) that transfers ownership of the property from the seller to the buyer.
Calculation: In Sri Lanka, stamp duty is calculated on a tiered basis:
3% on the first LKR 100,000 of the property value.
4% on the remaining value.
Example: For a property valued at LKR 20,000,000:
First LKR 100,000 x 3% = LKR 3,000
Remaining LKR 19,900,000 x 4% = LKR 796,000
Total Stamp Duty = LKR 3,000 + LKR 796,000 = LKR 799,000
Who pays: Generally paid by the buyer.
Legal Fees (Notary Public Fees):
What it is: Fees paid to a qualified lawyer or Notary Public for their services in facilitating the legal transfer of the property. This includes:
Title Search/Due Diligence: Investigating the property's ownership history at the Land Registry to ensure a clear title and no encumbrances (mortgages, liens, disputes). This is extremely important in Sri Lanka.
Drafting Documents: Preparing the "Agreement to Sell" (if applicable) and the final "Deed of Transfer."
Attestation: Notarizing the Deed of Transfer.
Registration: Facilitating the registration of the new deed at the Land Registry.
Typical Range: Lawyers typically charge between 1% and 3% of the property's value, depending on the complexity of the transaction and the lawyer's experience.
Registration Fees:
What it is: A fee paid to the Land Registry for officially recording the new Deed of Transfer and registering the change of ownership. This fee is usually nominal compared to stamp duty and legal fees, but it's a mandatory cost.
II. Mortgage-Related Closing Costs (if taking a home loan)
Bank Processing/Application Fees:
What it is: Fees charged by the bank for processing your loan application, underwriting the loan, and general administrative costs.
Typical Range: Varies by bank, often a flat fee or a small percentage of the loan amount.
Property Valuation Fee:
What it is: The bank will require a professional valuation of the property to ensure its market value supports the loan amount. This fee covers the cost of the valuer.
Who pays: Typically paid by the buyer.
Mortgage Stamp Duty:
What it is: If you take a mortgage, there is a separate stamp duty on the mortgage bond itself.
Calculation: Typically 0.1% of the mortgage value for housing loans from licensed commercial banks, on the amount exceeding LKR 3 million. If the mortgage value is LKR 3 million or less, stamp duty may not be required for the mortgage deed.
Who pays: Generally paid by the borrower (buyer).
Mortgage Insurance (if applicable):
What it is: Some banks may require you to take out mortgage protection insurance, especially if your down payment is low, to protect the bank in case you default.
Who pays: The borrower.
III. Other Potential Costs
Real Estate Agent Commission (Buyer's Agent):
What it is: While typically the seller pays the real estate agent's commission (usually 3-5% of the sale price), in some cases, if you have specifically engaged a buyer's agent who provides dedicated service to you, they might charge a separate fee. This should be clearly agreed upon in writing beforehand.
Who pays: Clarify with your agent.
Property Inspection Fees (Optional but Recommended):
What it is: Fees paid to a professional structural engineer or surveyor to conduct a thorough inspection of the property for any hidden defects (structural issues, plumbing, electrical, dampness, pest infestations).
Why it's beneficial: This can save you from costly surprises down the line, especially for older properties.
Who pays: The buyer, if they choose to conduct one.
Municipal Rates/Property Taxes (Prorated):
What it is: The annual property tax (rates) paid to the local municipal council or Pradeshiya Sabha.
At Closing: At closing, these taxes are usually prorated between the buyer and seller based on the actual closing date. You will pay the seller for the portion of the year you will own the property after closing, for which the seller has already paid taxes.
Utility Deposits/Transfers:
What it is: Costs associated with transferring utility accounts (electricity, water, internet) into your name and any required deposits.
How to Prepare for Closing Costs:
Budget Accurately: Get estimates for all these costs from your bank and lawyer/notary public early in the process. Don't underestimate them. Aim to save 5-10% of the property value just for closing costs, in addition to your down payment.
Get a Detailed Breakdown: Before closing, your bank and lawyer should provide you with a detailed breakdown of all charges. Review it carefully.
Negotiate (Where Possible): While statutory fees like stamp duty are fixed, some fees (like legal fees) might be slightly negotiable depending on the lawyer.
Keep an Emergency Fund: After paying for the down payment and closing costs, ensure you still have an emergency fund for unexpected home repairs or financial setbacks.
Understanding and budgeting for closing costs is a critical part of being a financially prepared homebuyer in Sri Lanka. It ensures a smoother transaction and prevents post-purchase financial strain.