If you’re purchasing a home in Ontario, you must be prepared to pay closing costs. Closing costs are a combination of fees, ranging from legal fees to appraisal costs, that are owed in addition to any relevant down payments, deposits, home insurance and mortgage costs. Keep reading to learn more about what closing costs entail, how much they are worth, and who is responsible for paying them.
How much are closing costs?
Closing costs vary widely, which means that unfortunately, it’s difficult to know exactly how much they will amount to for each homeowner. That said, experts generally recommend budgeting between 1.5% and 4% of the home’s purchase price. For example, if the home you purchased costs $500,000, you should budget a minimum of $7,500 and a maximum of $20,000 for these expenses. You can find a free closing cost calculator online to get a more accurate idea of how much you should expect to pay in closing costs. Most closing cost calculators will ask you to input basic information like the purchase price of the home, the down payment percentage, the location of the home, and the type of property it is classified as.
Closing costs all home buyers should expect to pay in Ontario
There are some closing costs that buyers should prepare to pay, no matter where they live in Canada or what kind of home they buy, and then there are some that are buyer-specific. The following is a list of closing costs nearly all home buyers should expect to incur:
Land taxes
All real estate purchases in Ontario are subject to land taxes. Land taxes vary across Canada but are usually referred to as land transfer taxes (LTTs) or property transfer taxes (PTTs). Ontario has a multi-tiered provincial land transfer tax, which means that the amount of tax you pay is dependent on the purchase price of the home. However, buyers must be aware that certain municipalities in Canada have their own property transfer taxes, one of which is Toronto. This means that if you buy a house in the municipality of Toronto, the sale will be subject to both Ontario’s provincial land transfer tax and Toronto’s municipal property transfer tax.
Legal fees
Legal fees are one of the most common types of closing costs. When you buy a home in Ontario, you will need to work with a real estate attorney to seal the deal. Your attorney will review key documents, like the purchase agreement and mortgage contract. They may also help with the title search and registering a title in your name. Hiring a lawyer will cost money, and can be quite expensive depending on which part of the province you live in. Therefore, home buyers need to budget an appropriate amount for legal fees when buying a home.
Appraisal fee
If you are buying a new home with a mortgage, then another closing cost you will likely have to pay is the appraisal fee. This is because most mortgage lenders require borrowers to have their homes appraised before they will approve them for a mortgage loan. The lender needs to confirm the market value of the home in order to decide how much money to loan you. The cost of hiring a professional appraiser to conduct the home appraisal usually falls to the home buyer, though in some cases, the lender may agree to waive this fee in lieu of a smaller financing fee to secure a mortgage with you.
Home inspection fee
Conducting a home inspection prior to buying a home may not be mandatory but it is so common that we have decided to include it in this list. Hiring a professional inspector to inspect your home before signing on the dotted line is one of the smartest decisions you can make as a home buyer. By having your home inspected, you can be sure that there are no major issues or repairs needed. If the inspection reveals the opposite of what you hoped, you might be able to negotiate with the seller to lower the purchase price or complete some of the necessary repairs before the move-in date. Please note that the cost of a home inspection is usually the responsibility of the buyer.
Title insurance
Title insurance is typically required by mortgage lenders. So again, if you are buying your Ontario home with a mortgage, you will probably need to purchase a title insurance policy. Title insurance is needed in the event that a property ownership dispute arose after you purchased the home. In some cases, your real estate attorney will handle the purchasing of title insurance for you, which means it may be incorporated into your closing costs.
Property survey fee
One final closing cost that may also be required by a mortgage lender is the property survey cost. A property or land survey is when a surveyor examines the land your home sits on. Specifically, they will measure the plot of land and assess the structures sitting on it. As you might suspect, land survey costs vary depending on where you live, as well as the size of your home and the time of year the land is being surveyed.
Closing costs some buyers may have to pay in Ontario
As mentioned above, not all buyers incur all closing costs. Some costs are subject to specific types of homes, buyers, or parts of the province. The following is a list of closing costs that only some home buyers will be subjected to:
CMHC mortgage default insurance
Mortgage default insurance is a closing cost that a home buyer will incur if their down payment amounts to less than 20% of the purchase price. In Canada, any home purchases with a down payment below 20% are subject to mortgage default insurance, which is issued by the Canada Mortgage and Housing Corporation (CMHC). This type of insurance is often referred to as CMHC insurance. CMHC insurance is designed to protect the mortgage lender should the borrower stop making their monthly mortgage payments and default on their loan. Typically, the cost of the CMHC insurance policy must be paid upfront, which means that buyers must be prepared to pay their premiums when they close on their homes. The cost of mortgage default insurance varies, averaging between 2.8% and 4.0% of a borrower’s mortgage.
New home warranties
If you purchased a brand new home, then the sale of the home may be subject to a new home warranty. Ontario is one of three Canadian provinces, the other two being Quebec and British Columbia, that require buyers of new homes to pay a warranty. This warranty usually covers material and building defects, as well as structural abnormalities. It varies in price but could be anywhere from a few hundred dollars to a few thousand dollars.
Property tax adjustments
As mentioned above, home purchases in Ontario are subject to property taxes. Usually, these can be paid monthly, quarterly, or annually. If the seller of the home you bought opted to pay for their property taxes upfront, then you may have to reimburse the seller for these taxes by paying them a prorated amount from the day you close on the house to the day they’ve paid up to. The amount you might be required to pay in property tax adjustments will be listed on the Statement of Adjustments, and the first payment owed will need to be made on closing day.
Non-resident speculation tax (NRST)
As of 2017, the provincial government of Ontario charges a 15% tax on the purchase of a residential property in the Greater Golden Horseshoe Region by people who are not citizens or permanent residents of Canada. Foreign corporations are also required to pay this tax. Purchases by non-residents are therefore subject to both the NRST, as well as any relevant land transfer or property transfer taxes.
Interest adjustments
Home buyers whose first mortgage payment doesn’t come out until after closing day may incur an extra fee in the form of an interest adjustment. This occurs because interest will have accrued between the closing day on your home and the day your first mortgage payment comes out. The percentage of interest you will have to pay depends on the closing day and the payment schedule you selected. For example, if you purchased a home for $500,000 with a mortgage interest rate of 3.0%, the total interest owed would be $15,000. To determine how much interest you owe per day, you would divide 15,000 by 365 days to get $41.09. You would then multiply this daily interest rate by the number of days between your closing date and your mortgage payment date. The result is the interest adjustment you will need to pay and therefore should be factored into your closing costs.
GST/HST
If you choose to build a home in Ontario, it is important to remember that the purchase of the home will be subject to GST/HST. The good news is that if the builder of your home included the GST/HST in the purchase price, you might be able to pay for it with your mortgage. But if they didn’t include it, it will need to be paid for separately at closing. Given that GST/HST in Ontario is 13%, this additional fee can drastically increase your closing costs. Therefore, if you are buying a new construction home, it’s important to understand whether these taxes are included or excluded from the purchase price so you can appropriately budget for closing day.
Additional fees that come with buying a home in Ontario
Now that you have a better idea of the costs that home buyers may be subject to paying on closing day, we’re going to dive into a few other costs that come with buying a home in Ontario:
Down payment
Anyone buying a home in Canada is required to make a down payment. There are strict rules surrounding down payments in Ontario. Down payment requirements range from 5% of the purchase price to 20% of the purchase price and depend on how much your home costs. For properties under $500,000, a 5% down payment is all that is required. For homes between $500,000 and $1,000,000, a 10% down payment is required, and for homes over $1,000,000, a 20% down payment is required.
Home insurance coverage
Home insurance is another expense that home buyers will need to prepare for. Home insurance is typically required of any home buyer that takes out a mortgage loan. Most banks and mortgage lenders even require proof of home insurance mortgages before they will grant someone a mortgage loan. There are several types of home insurance coverages available to homeowners, such as dwelling coverage, contents coverage, personal liability coverage, equipment breakdown coverage, sewer backup coverage, overland water coverage, and more. Most home insurance policies have one year terms, at which point you can consider changing house insurance policies if your current policy is no longer working for you. That said, if you are still paying off your mortgage, you will likely still need to retain some type of coverage. Lastly, even if you choose to buy your home without a mortgage, purchasing home insurance is still important. Otherwise, you will have no financial recourse in the event that your property is damaged or someone brings a legal claim against you or your home.
Moving costs
Anytime someone moves into a new home, they will need to prepare for the cost of moving. Moving costs vary greatly as they are dependent on the volume and value of your belongings, as well as whether you hire a professional moving company to move your items for you. If you go with the latter, the cost of moving will also depend on how far you’re moving, what services you pay for, whether it is moving only or packing and moving, and if you opt to buy moving insurance. We recommend shopping around to compare moving companies and moving insurance quotes before making a decision.
Tips to reduce closing costs in Ontario
Closing costs can be hefty, but there are ways to reduce how much you pay on closing day. From shopping around and comparing attorney fees to taking advantage of home buyer incentives, keep reading for expert tips on how you can reduce closing costs:
- Contact several real estate attorneys in your area and learn about their services and fees. Compare them to determine which option makes the most financial sense.
- If this is your first mortgage, look for a mortgage lender that offers rebates on new mortgages or for first time home buyers.
- Take advantage of tax deductions related to your home, such as home insurance tax deductibles, come tax time.
- Buy a less expensive home, as the lower your purchase price, the lower your land taxes and monthly mortgage payments will be. You will also have more money to put towards home renovations and customizations down the road.
- If you can afford it, make sure your down payment is no less than 20% as this will allow you to avoid buying mortgage default insurance.
- Avoid an insurance premium increase on your home insurance policy by taking advantage of home insurance discounts. For instance, by installing a monitored alarm system or sewer backup prevention device in your home, you could save money on your property insurance policy.
- Take advantage of first time home buyer incentives to lower the overall cost of purchasing a home. A few popular home buyer assistance programs in Ontario include:
- Home Buyer’s Plan: Under the federally-run Home Buyers’ Plan, eligible homebuyers can withdraw up to $35,000 from their Registered Retirement Savings Plans to purchase a qualifying home.
- Home Buyers’ tax credit: The Home Buyers’ tax credit is another federal incentive that functions as a tax rebate, allowing buyers to claim an income tax credit of up to $5,000 on a qualifying home. This results in a rebate of $750.
- Ontario First-Time Home Buyer Incentive: To help ease the burden of Ontario’s land transfer tax, this home buyer incentive allows eligible buyers to receive a maximum land transfer tax refund of $4,000.
- Toronto First-Time Home Buyer Incentive: Similar to the Ontario First-Time Home Buyer Incentive, this municipal assistance program allows homeowners to save money on the City of Toronto’s property transfer tax. Specifically, it offers a tax rebate of up to $4,475 and can be claimed in conjunction with the Ontario First-Time Home Buyer Incentive, for possible savings of $8,475.
Get in touch with BrokerLink for more information on closing costs in Ontario
If you still have questions about closing costs on home purchases in Ontario, get in touch with BrokerLink today. We have a team of home insurance experts ready and willing to answer your questions. Any one of our licenced insurance advisors can provide you with greater insight into the types of legal and administrative fees that must be paid on closing day, as well as information on any other additional fees incurred when you buy a home. For instance, home buyers should plan to purchase home insurance coverage by moving day. A broker for home insurance can help you do just that. Get in touch today to speak with a BrokerLink insurance broker and have your questions answered.
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FAQs on closing costs in Ontario
What costs should I be prepared to pay when buying a home in Ontario?
There are many costs that buyers must be prepared to pay when buying a home in Ontario. These costs vary depending on the circumstances of your home purchase, but they often include a down payment, earnest money deposit, home insurance, moving costs, legal fees, land taxes, title insurance, home inspection fees, home appraisal fees, and property survey fees, at a minimum. On top of these expenses, buyers may also need to budget for property tax adjustments, interest adjustments, CMHC insurance, non-resident speculation tax, and more.
What are closing costs?
Closing costs make up a mix of legal and administrative fees that are owed when you purchase a house in Canada. Examples of typical closing costs include land taxes, legal fees, title insurance, home inspection fees, home appraisal fees, and property survey fees. Additional closing costs that buyers may be required to pay include mortgage default insurance, interest adjustments, property tax adjustments, sales tax, non-resident speculation tax, and more. Closing costs vary from buyer to buyer but usually come out to between 1.5% and 4% of the purchase price.
Who is responsible for paying closing costs in Ontario?
Generally speaking, most closing costs are paid for by the home buyer. For instance, buyers should prepare to cover legal fees, home inspection fees, home appraisal fees, and more. In some cases, the buyer can negotiate with the seller to cover some of these fees. Alternatively, in some scenarios, a mortgage lender might agree to waive a certain fee, such as an appraisal fee, to secure your business. That said, it is the buyer who should budget for these costs as it is most often their responsibility to pay them.
How are closing costs paid?
Closing costs are typically paid via your real estate attorney. These costs, along with your down payment, are often paid on the date that you meet your attorney to sign the mortgage registration documents. Oftentimes, this is about a week before the closing date. Your attorney will advise you of the total amount owing in advance of the payment date.
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