July 17, 2016

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Studies have shown that over 50% of buyers are caught off-guard by the amount that they need to spend on the closing costs for their home purchase.

I’m going to make sure that you’re well aware of all of the costs that you might incur before you move into your new home. In general, you will need approximately 3% – 4% of the purchase price saved for your closing costs. Here’s a detailed breakdown of each of those costs:

Pre-closing costs

Home inspection

Getting a home inspection is a smart decision, because a qualified home inspector can identify underlying problems with a home’s major systems (heating and electrical), appliances (stove and refrigerator), and structural elements (windows, roof and foundation).

Approximate cost: $400 – $700

Note:  In multiple offer bids for a home, some buyers choose to waive home inspections to make their offer more attractive. There is a lot of risk with this tactic and not always recommended.

Appraisal

Your lender (for example, a bank) may require an appraisal of the property  that you want to buy before they agree to provide you with financing. Lenders want to make sure that the value of the property matches its sales price. The appraisal cost is usually covered by your lender, but you should ask upfront.

Approximate cost: $400 – $500

Closing Costs

Land transfer tax

The land transfer tax is paid by the buyer on the date of final closing. The Ontario Land Transfer tax can be up to 2% of the purchase price. In Toronto, an additional tax applies, which is also up to 2% of the purchase price. However, first-time homebuyers are eligible for a refund of the tax.

The formula for calculating Ontario Land Transfer Tax is:

  • 0.5% on the first $55,000
  • Plus 1% of the amount from $55,001 to $250,000
  • Plus 1.5% of the amount in excess of $250,001 to $400,000
  • Plus 2% of the amount in excess of $400,000

The formula for calculating Toronto Land Transfer Tax is:

  • 0.5% on the first $55,000
  • Plus 1% of the amount from $55,001 to $400,000
  • Plus 2% of the amount in excess of $400,000

Mortgage insurance

If the down payment on your home is less than 20% of its purchase price, you will be required to buy mortgage insurance. Mortgage insurance rates depend on how much money you are borrowing from your lender.  While the mortgage insurance premium can be added into the amount of the Mortgage, the provincial sale tax on the premium is payable immediately on the of the advance of the mortgage funds.

The amount of the mortgage insurance premium is calculated using a loan/value ratio, The premiums are as follows:

Amount borrowed Premium
75% – 80% 1%
80% – 85% 1.75%
85% – 90% 2%
90% – 95% 3.25%

Legal fees

There are a number of legal documents and contracts involved in the purchase of a home. Your lawyer will do a title search on the home to make sure that the seller can actually sell the property and that there are no liens against it. They will also register the deed and mortgage for you.

Approximate cost: $700 – $1,500

Disbursements

Buyers are responsible to pay for certain incurred by their lawyer in respect to various certificates, searches and registrations. Example of such approximate disbursements area as follows:

Disbursements Approximate cost
Registration of Deed $50.00
Registration of Mortgage $50.00
Title Insurance* $270.00
Abstract of Title & Execution Certificate $150.00
Transaction Levy $50.00

*Title insurance protects you against title fraud, errors in public surveys, encroachment issues with neighbours and more.

Approximate cost: $600

Adjustments

Adjustments are costs that the seller has pre-paid for the year, but will be transferred to you because you are the new owner. You will responsible to refund the seller the unused portion of any prepaid bills such as, property taxes, maintenance fees and rental fees for hot water heaters.

For example, if the seller has already paid the property taxes for the calendar year in the amount of $1,200, and you become the new owner on June 30th, there will be a credit on closing to the Seller of $600.

Home insurance

You must have insurance on your home and it’s content before lenders will release the funds for the sale to close.

Harmonized Sales Tax (HST)

If you are buying a newly-constructed home, you will have to pay 13% HST on the purchase price. Some buyers may be eligible for rebates from both the Ontario and Federal governments.

Tarion new home warranty program

In Ontario, newly-constructed home, are covered by a warranty program, administered by Tarion. The warranty protects new home buyers against various issues that may emerge, including structural defects in the home. It also offers deposit protection to buyers of new homes. Sometimes the Tarion enrollment fee is included in the purchase price and other times it is due at closing. For more information, visit www.tarion.com.

After-closing costs

Moving costs

Moving costs vary widely based on how much stuff you have, how far you’ll be moving, and whether you’ll hire a professional mover or rent a truck and move yourself.

Utility and service activations

Some gas, hydro, water and telecommunications companies charge an activation fee.

Renovations and repairs

If you want to make major renovations after you move-in, it can add significantly to your costs. A home inspection or disclosure from the seller may also identify repairs that are needed.

Appliances, furniture and decorations

Once you’re in your new home, there’s a good chance you’ll want to change the décor to make it your own.

Conclusion

When buying a home, it’s important to know all of the costs so that you are prepared and armed with enough information to make important decisions. If you budget for 3-4% of your purchase price, you won’t be caught off-guard when these costs are incurred.

Do you have more questions about closing costs? Ask your question below in the comments, or contact me directly. I’m here to help.

About the author 

Lorie Brodie

Hi! My name is Lorie Brodie and I'm looking forward to helping you find your next home. I work in Toronto and the GTA, and I'm always available to answer any of your real estate questions.

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