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Buying your first home is an exciting milestone, but it also comes with many financial responsibilities that many first-time buyers should be fully prepared for. Understanding all the potential costs involved will help you avoid surprises on closing.
Closing Costs
When buying a home, there are closing costs that add up, which buyers need to factor into their budget. Closing costs are the additional fees and expenses beyond the purchase price that are necessary to finalize a real estate transaction.
Common closing costs when purchasing a residential property include deposits, land transfer tax, title insurance, legal fees, title searching fees, home inspection fees, property appraisal fees, etc..
Land Transfer Tax
Land transfer tax is a mandatory provincial government tax paid by the buyer upon obtaining ownership of property and is calculated based on the property's purchase price. It is important to note that when purchasing a home in Toronto, the City of Toronto has its own municipal land transfer tax, which is in addition to the provincial land tax.
You can calculate the land transfer tax owed on your property using an online land transfer tax calculator.
Title Insurance
Title insurance protects buyers from potential financial losses such as title defects, title fraud, and other title-related issues. It should not be confused with homeowner's insurance, which covers incidents like fire and property damage. In Ontario, the cost of obtaining title insurance is a one-time fee, and can generally cost anywhere from $250.00 to over $1,500.00 (depending on your purchase price).
Although it is not mandatory to purchase title insurance, many lenders require buyers to purchase title insurance as a condition of their mortgage.
Deposits vs Down Payments
A down payment is part of the purchase price paid to the seller, with the remainder typically financed through a mortgage. A deposit, on the other hand, is not mandatory but generally customary to show commitment to buying the seller's property. A deposit is given to the seller, or more commonly the seller's realtor or lawyer in trust, after the buyer's offer is accepted, and unless the seller breaches the purchase agreement, the deposit is not typically returnable. However, it is important to note that a breach by the purchaser does not automatically result in the release of the deposit to the seller. For further information about deposit forfeiture, kindly see our blog on collapsed real estate transactions.
Deposits can be refundable if explicitly stated in the Agreement of Purchase and Sale. For example, many conditions will state that if the buyer cannot satisfy the condition by a specific date, the deposit will be returned to them in full (i.e. a financing condition).
Other Closing Costs
Lenders in Canada often require buyers to conduct a professional property appraisal to determine the home's value and the mortgage amount. Buyers can expect to budget $300 to $600 for this closing cost.
Home inspections are another closing cost for which buyers should allocate between $300 and $1000. While not mandatory, professional home inspections are highly recommended as they can help buyers avoid more costly problems down the line.
Lastly, in Ontario, a real estate lawyer is legally required when buying a home to facilitate the transfer of ownership. A real estate lawyer will assist buyers with registering the property with the land registry office, reviewing legal documents, conducting a title search, and performing various other tasks to ensure a smooth home-buying process. Legal fees vary based on the complexity of the transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
