Avoid surprises by getting a handle on what expenses may be down the road for your purchase.
Homebuyers entering the real estate market for the first time may be unsure of what to expect on closing day. Gaining clarity around what is involved and which expenses may be incurred can help to untangle the process for new house hunters.
Let’s take a look at some of the closing costs a homebuyer can anticipate in addition to a down payment.
Depending on how much of a down payment you plan to make on your dream home, it may be necessary to obtain mortgage insurance.
Mortgage insurance may be required by your lender if your down payment is less than 20% of the sale price of the home or for other reasons. According to the Canada Mortgage and Housing Corporation (CMHC), the amount of a down payment depends on the purchase price of the home.
For example, if the home costs $500,000 or less, you will need a minimum down payment of 5%. If a property costs more than $500,000, a minimum of 5% down will be required on the first $500,000 and 10% on the remainder. For homes costing $1,000,000 and higher, mortgage loan insurance is not available.
As an example, on a $750,000 home the mortgage insurance premium ranges from $17,850 with a 15% down payment to $28,000 with a 6.67% down payment.
You can find out what your mortgage insurance cost may be by navigating to our calculator.
The Canada Mortgage and Housing Corporation is a key provider of mortgage insurance in Canada. New buyers can find more information on its website.
Land Transfer Tax
Purchasers in most large Canadian cities can add Land Transfer Tax to their list of closing costs. These taxes, levied on properties that are changing hands, are the responsibility of the buyer.
Depending on where you live, taxes can range from half of a percent to two percent of the total purchase price.
Here’s how Land Transfer Tax is calculated in Ontario:
Up to $55,000 X 0.5% of total purchase price
From $55,000 to $250,000 X 1% of total purchase price
From $250,000 to $400,000 X 1.5% of total purchase price
From $400,000 up X 2% of total purchase price
That said, you can easily calculate Land Transfer tax using this calculator.
Because a seller is responsible for covering the cost of the real estate fee during the sale of a home, a buyer will customarily cover the Land Transfer Tax. Aside from the down payment and mortgage insurance, this tax will likely be one of the more significant closing costs for a buyer to consider.
For example, using our earlier example of the $750K home, the Land Transfer Tax levied by the provincial government on a home outside the City of Toronto would amount to $11,475.
For buyers looking to purchase within the boundaries of the City of Toronto, you will need to consider an elevated Land Transfer Tax. Toronto has a Land Transfer Tax equal to the provincial one, so by purchasing a home in the City of Toronto your tax will be the provincial amount plus the municipal tax.
Your real estate lawyer is available to offer advice as early as the offer stage, ensuring that a buyer or seller is comfortable with the terms of the agreement and their interests are protected. Once an offer has been accepted, a lawyer will investigate title on the property to ensure there are no liens or encumbrances that might prevent a sale from proceeding.
Your legal representative will communicate with the solicitor on the other side of the transaction and coordinate the flow of both funds and documents. On closing day, your lawyer will complete the transfer of ownership and file the necessary paperwork with the government.
Legal fees vary depending on the complexity of the transaction and location, however most buyers can expect to aside $1000-$1500 per transaction to cover disbursements, registration costs and title insurance.
When looking to purchase a home, buyers are usually looking for reassurance that the structure is stable and that all systems are working properly. For this reason, a buyer will often include a condition in an offer to purchase that allows time to investigate and perform due diligence on the home.
The cost of a home inspection ranges depending on where you live and how large the property is, but they usually run between $350 and $500. If you are not sure who to hire, you can always speak with your REALTOR® about recommending a reliable professional to perform this work.
Lenders often require a home appraisal to confirm that the buyer is paying a fair price for a home. In some cases the cost of the appraisal is built into pre-negotiated mortgage terms, however at other times a buyer will need to absorb this cost.
Depending on your lender and the value of the property, this investment can range between $350 to $750 or more. Homebuyers can clarify the cost of the appraisal fee with your lender or mortgage broker at the time a preapproval is arranged.
Adjustments on Closing
On the day you finalize the purchase of your new home, your real estate lawyer will assign per diem costs for things like utility charges and property taxes.
For instance, if the seller has paid the property taxes for the full year, a buyer's lawyer will assign a prorated amount in repayment. Note that the per diem charges for the actual day of closing are the responsibility of the buyer.
Speak with your REALTOR® or real estate lawyer about what the utility and property tax specifics may be for the home you are looking to buy so you can budget in advance.
In addition to hiring a moving company for the relocation, you may want to plan for other expenses surrounding the move to your new home.
For example, utility companies may charge a disconnection and/or reconnection fee along with other administration fees.
Mail forwarding with Canada Post ranges in price depending on the duration of the service and where your relocation takes you.
There may be other closing costs to consider depending on your specific situation.
For example, depending the future use planned for a property a buyer may need to enlist the services of a professional to perform a formal survey. If it is a condominium you are looking to purchase, you may need to absorb the cost of ordering a Status Certificate.
Seeking the help of a third-party professional may be necessary as you plan your budget for your closing day. This may involve the services of a real estate lawyer, accountant, tax professional, mortgage broker or other disciplines.
Your REALTOR® is always on hand to help you with referrals to these and other trusted professionals.
Reference: Canada Mortgage & Housing Corporation (2021). Buying.
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