Closing Costs - What you can Expect:
It is important to be fully aware of all the costs involved when buying a home, preferably before you go house hunting! Knowing in advance what these additional costs are, over and above the down payment that you might have, will help you plan for a smooth closing and avoid any unpleasant surprises. You should allow at least 1.5% of the purchase price for closing costs although we recommend approximately 2% to be on the safe side.
Below is a comprehensive list of closing costs that you might incur, but remember that these are estimates and should be used only as a general guideline.
Legal Fees and Disbursements
A lawyer will charge a fee for their professional services involved in drafting the title deed, preparing the mortgage, and conducting the various searches. Lawyers also bill for disbursements, which are out-of-pocket expenses connected with your purchase, such as registrations, searches, supplies, etc., plus HST. The actual base fee that the lawyer will charge will vary between firms. Be sure to determine exactly what this will amount to in a worst-case situation. Total costs for the lawyer, for a typical purchase transaction in the Greater Toronto Area, with one mortgage will range between $1200 to $1,500 including disbursements and HST. We recommend you call one or two lawyers and obtain a quote directly from them including both their fee and estimates of disbursements before choosing which one you’d like to use.
Land Transfer Tax
Ontario has a land transfer tax that is payable on closing (the day you get the keys - i.e. when the property is transferred to your name), and the amount varies depending on the price of the home, on whether or not you are a first time home buyer and on which city you are purchasing in. Typical amounts for this provincial tax range from 1 to 2% percent, based upon a complicated formula, and in addition, the City of Toronto has its own Land Transfer Tax, which can effectively double the taxes charged. Both Ontario and Toronto offer a tax rebate for first time buyers, with certain limits. It's important to check with your agent, lawyer or mortgage lender to have all the facts regarding land transfer taxes, before signing on the dotted line.
You should budget for insurance on your new home. Insurance costs can include default mortgage insurance, homeowners insurance, mortgage life insurance and title insurance.
Property Tax and Prepaid Utilities Adjustments
At the time of a sale, the lawyer for the buyer must confirm that local taxes have been paid up to date. If they are, a Tax Certificate is issued, from which any adjustments can be made - usually requiring the buyer to compensate the seller for any prepaid taxes. If they are not up to date, the municipality requires that the seller pay them off from the proceeds of the sale. Therefore, remember that if the previous owner has prepaid property taxes or other utilities for the year, they will be credited the prepaid portion on closing. If they paid all their taxes by April, expect a large adjustment cost on closing! Again, your lawyer will confirm all this for you. - this is one of the services they provide to justify their fee.
Most lenders require an appraisal report to be completed, before they hand over any mortgage loan money. They want to be assured that the property is worth what you are paying for it, and the cost normally ranges between $150 to $300 depending upon the location and complexity of the property.
Its always a good idea for buyers to have a certified home inspection done on any freehold property they have made a successful offer on - to verify the condition of the property prior to the "firming up" of the Real Estate transaction. The scope and detail may vary, but most reports indicate any specific problems or maintenance issues found in the house, and the estimated cost to repair. While almost every property has some minor maintenance issues, the real purpose of the home inspection is to have an expert look for any hidden defects, which could be expensive to fix. Home inspections are usually not required for highrise condominiums, as most of the 'common areas' maintenance is covered by the condo corporation. For all freehold transactions, home inspections can cost anywhere from $300 - $500 dollars.
If you arrange to make your mortgage payments monthly on the first day of the month, and your transaction closes after the first day of the month, your lender may charge you interest on closing up to the first theoretical payment date, called the Interest Adjustment Date (IAD). Your mortgage agent will calculate this for you. Remember, that, unlike rent, which is paid in advance at the beginning of the month, all mortgages are paid in arrears - at the end of the month - so if your possession date is June 1st, and you choose to pay monthly, then your first payment will be July 1st. In this example there is no Interest Adjustment payable. However, if you moved in on May 29th, with your first payment on the first of the month, your first payment would still be July 1st, but there will be a three day Interest Adjustment (from May 29th to to the “official start date” of June 1st).