Surprises are great for birthdays, but not when you are buying a home. If you are buying a home or condominium there will be closing costs associated with your purchase. Failing to account for these costs in advance can create a major problem which could delay or jeopardize your closing. This column will explain your closing costs when purchasing a home.
In order to be safe, you should budget anywhere from 1.5-2.5% of the purchase price for your closing costs. This may vary, depending on a number of factors such as the location of the city that you have purchased. The following is a list of some of the closing costs that you will need to pay on closing:
Land Transfer Tax - When purchasing a home, you will have to pay provincial Land Transfer Tax. This is based on a formula which is a sliding scale so the higher the purchase price, the more Land Transfer Tax that you will pay. If you are purchasing a property in the City of Toronto, you must also pay a municipal Land Transfer Tax. If, however, you are a first-time buyer, you may be eligible for a rebate on your Land Transfer Tax. We can calculate your Land Transfer Tax for you.
Mortgage Insurance - If your mortgage is insured with CMHC or Genworth, you will be required to pay a mortgage insurance premium on closing along with PST on the premium. The insurance premium will be added to the mortgage. Keep in mind however, that the amount of funds that your lawyer will receive on closing will be reduced by the amount of the insurance premium and other possible charges by the mortgage lender.
Legal Fees and Disbursements - You will need to pay legal fees and disbursements on closing. These will vary from lawyer to lawyer and it is my recommendation that you deal with a lawyer who specializes in real estate. We encourage clients to call us for a free no obligation quote where will be able to provide them with an estimate for legal fees and disbursements. Do not select a lawyer based on price alone. Find a lawyer who will personally meet with you to sign the documents.
Home Inspector - You should always ensure that your offer to purchase is conditional on, among other things, a home inspection. You will need to hire a reputable home inspector to inspect the home and provide you with a written report. Ask your realtor for recommendations for the names of home inspectors.
Closing Adjustments - Your lawyer will provide you with a statement of adjustments setting out how much the seller has paid towards the property taxes and monthly common expenses for condominium properties. If the seller has prepaid these amounts, the seller will receive a credit on closing.
Newly Constructed Homes - Many purchasers fail to anticipate that buying a new home from a builder is different from buying a resale home, particularly when it comes to adjustments on closing. If you have bought a new home from a builder, there will be numerous adjustments which you will have to pay for on closing. These include lot levies, Tarion enrollment, tree planting, hydro, water and gas meters installation and numerous other items. These can amount to thousands of dollars. These may be capped if you have your lawyer review the Agreement prior to signing it with the builder, or during the conditional period.
Title Insurance - For a relatively small one-time premium, title insurance will protect your title or home ownership from a number of risks including fraud. I encourage all of my purchasers to obtain it and this will be arranged through my office. The amount of the premium depends on the purchase price.
Fire Insurance - Your lender will require that you have a fire insurance policy in place for closing. The amount of insurance must be at least the amount of the registered mortgage or the replacement cost of the home. The cost will vary, but you will need to arrange for the insurance and provide my office with proof of insurance prior to closing.
As you can see, there are numerous adjustments which a purchaser must anticipate when purchasing a home or condominium. Working with an experienced lawyer will eliminate surprises which can delay or jeopardize your closing if you find that you do not have the necessary funds to close your purchase.
By Lorne Shuman