CLOSING COSTS EXPLAINED
One of the more common questions we get from clients is how much money should I set aside for CLOSING COSTS when I purchase my next home?
Closing costs are a list of charges your lawyer presents to you on the closing date of your home. Many people are surprised at the additional costs over and above the price of the home. According to the CMHC and Genworth Financial you should have at least 1.5% of the purchase price for closing costs in addition to the down payment (have around 2.5% to be on the safe side). The costs may vary among cities in Ontario.
Below you will find a brief explanation of these costs. Please note these are some of the closing costs you may encounter depending on your specific situation. Use this as a guideline then talk with your lawyer who can provide a more realistic estimate for your situation.
Appraisal Fee (Requested By Mortgage Lender)
An appraisal provides the lender with a professional opinion of the market value of the property. This cost is normally the responsibility of the homeowner and it can cost between $100 - $300.
Home Inspection Fee
A professional inspection of the home, top to bottom, is for the benefit of the buyer. A home inspection can cost anywhere from $400 - $500 and is well worth the investment. I have a few very good go to home inspectors that use infrared and other technological devices during the inspection.
Mortgage lenders require a certificate of fire insurance to be in place from the time you take possession of the home. The amount required is generally the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size, amount of coverage, the insurance company and the municipality. The cost can vary anywhere from $250-$600 annually for most properties.
Provincial Sales Tax on Mortgage Insurance
If your mortgage is insured, (CMHC or Genworth Financial), you will be required to pay the applicable taxes on the insurance premium on closing. While the insurance premium can be added to the mortgage amount, the tax must be paid at closing.
Title Insurance Fee
Title insurance is an insurance policy that protects you, the home owner, against challenges to the ownership of your home or from problems related to the title to your home. The policy provides coverage against losses due to title defects, even if the defects existed before you purchased your home. A policy costs between $250 and $500.
Legal Costs and Disbursements
Lawyers and notaries charge fees for their services involved in drafting the title deed, preparing the mortgage, and conducting the various searches. Disbursements are out-of-pocket expenses incurred during the process such as registrations, searches, and supplies. A typical real estate closing in the GTA will cost you roughly $1,500 (on average).
Land Transfer Tax
In Ontario, there are two types of Land Transfer Tax (LTT). Every municipality charges a LTT whenever property is purchased, and this is paid for by the buyer. In Toronto, however, buyers must pay the LTT PLUS the Municipal Land Transfer Tax (MLTT) - which works out to be roughly double than anywhere else in the province. Land transfer tax is based on the purchase price. First time home buyers purchasing a new or re-sale home may be entitled to a refund. (See more information about first time buyers LTT refund)
New Home Warranty (Only for New Builds)
This is only for new home construction, when you buy directly from a Builder. The cost to the purchaser for this warranty is approximately $600 and should the builder default or fail to build to an agreed-upon standard the fund will finish or repair the deficiencies to a maximum amount. For more information on Ontario new home warranty visit http://www.tarion.com.
HST (Only for New Builds)
HST is payable on the purchase of newly constructed homes only. If you are purchasing a new home make sure you know who pays this, you or the builder. On the offer the purchase price will say "Plus HST" or "HST Included" and who gets any HST rebates. Many builders have included this cost into the purchase price so the buyer does not have to come up with it at closing.
An estimate should be made for closing adjustments for bills the seller has prepaid such as property taxes, utility bills, and other charges. Any bills after the closing date are the responsibility of the purchaser. A lawyer will let you know what they are once the various searches have been completed. This will appear on the lawyer's Statement of Adjustments.