When buying a home in Ontario, the purchase price you negotiate and settle on is the majority but not all of the cost you’ll be responsible for. There are several other fees that should be considered far before closing day. These fees are known as closing costs and are often paid out of pocket. Having an accurate estimate of your closing costs ahead of time will help you be financially prepared for closing day and will make the home buying process a lot more stress free.
The following closing costs are likely to be necessary in your home buying process in Ontario. Additional closing costs not listed may be involved.
Land Transfer Tax
According to the Ontario Ministry of Finance “When you acquire land or a beneficial interest in land, you pay land transfer tax to the province when the transaction closes”. This tax is calculated as a percentage of the purchase price and it is due upon closing. Ontario uses a multi-tiered system to calculate the tax you owe to the province. First time homebuyers may be eligible for a partial or full refund of the land transfer tax paid. The Ontario Ministry of Finance offers the following tax rates to determine what you will owe in Land Transfer Tax:
- amounts up to and including $55,000: 0.5%
- amounts exceeding $55,000, up to and including $250,000: 1.0%
- amounts exceeding $250,000, up to and including $400,000: 1.5%
- amounts exceeding $400,000: 2.0%
- amounts exceeding $2,000,000, where the land contains one or two single family residences: 2.5%.
Source: https://www.fin.gov.on.ca/en/bulletins/ltt/2_2005.html
Deposit
On the successful agreement of the purchase of your new home, a deposit is paid to the seller by you, the buyer, and will become part of the final purchase price if the sale is completed. A deposit shows the seller that you’re a serious and committed buyer. It demonstrates that you are willing and able to take a risk and that you have a stake in the agreement. If the sale goes through to completion, your deposit will be fully allocated towards the purchase price of the house. There is no set required amount for a deposit, but a higher deposit shows you’re very serious and will be taken into consideration by the seller in situations such as a bidding war. Your real estate agent will help you choose an appropriate and effective amount for your deposit.
Mortgage Default Insurance
If you choose to (or must) put less than a 20% down payment on a home you’re purchasing in Ontario, you’ll be required to buy mortgage default insurance. The less you pay as your down payment, the more you’ll pay in default insurance. Mortgage default insurance is put in place to protect your lender in a situation where you the borrower is unable to make your mortgage payments. Canadian Mortgage Housing Corporation (CMHC) is one of Canada’s largest mortgage default insurance companies so you will perhaps be familiar with the term CMHC rather than “mortgage default insurance”. Because the CMHC itself is financed through your mortgage being amortized over the lifetime of your mortgage, it is not usually considered a true closing cost, but the provincial tax on the premium is required up front as a closing cost.
The CMHC’s Mortgage Calculator can help you prepare for your mortgage default insurance and the applicable provincial sales tax.
Adjustment Costs
When you purchase a home in Ontario, your closing costs may include adjustment costs. If you’re buying a previously owned home, the previous owners may have already paid for things such as utilities, condo fees, property taxes and property maintenance services for the time period after they are no longer the owner and you are. The adjustment is made as a reimbursement to the previous owner for the costs they’ve incurred for time periods you’ll own the home.
Legal Fees and Disbursements
Legal fees necessary when purchasing a home will pay for your real estate lawyer’s time to manage all the legal paperwork involved. Additionally, disbursements are the expenses a lawyer incurs and may pay to a third-party on your behalf. These expenses can include things such as photocopying, registering the mortgage and carrying out a title search on the property. As the expert, your lawyer will accomplish tasks including but not limited to buying title insurance on your purchase, registering the home in your name and facilitating financial transactions leading up to and on your closing day. Speak to your lawyer, or a few lawyers prior to embarking on the home buying process to get a good idea of what the legal fees and disbursements will be when you purchase your home.
Title Insurance
According to the Financial Services Commision of Ontario, Title Insurance “is an insurance policy that protects residential or commercial property owners and their lenders against losses related to the property’s title or ownership”. In Ontario, Title Insurance is not mandatory but is considered by many as a very good idea. Title Insurance protects you against incidents such as errors in surveys, existing liens against the property’s title, title defects and title fraud. Depending on the insurance company you choose and the value of the property you are buying, Title Insurance may be approximately $300 to $500.
To be fully prepared for the exciting and important experience of buying a home in Ontario, be sure to work with both a real estate lawyer and a real estate agent that you trust. An experienced lawyer and an experienced agent will surely make the home buying process successful and easy for you.
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If you are seeking advice on buying a home in the Ottawa area, or have more questions for us, we are happy to provide you with helpful guidance and support. Email us at info@buyandsellottawa.ca or call us at 613-590-3036.