What are “closing costs” when buying a house in Ontario?

What are “closing costs” when buying a house in Ontario?

Simply put, closing costs are fees incurred in completing your real estate transaction.  They may be charged by your bank or mortgage company, a government entity, the buyer, seller or a third party. Due to the complexity of real estate transactions, there are usually a number of additional costs, beyond the purchase price of the home and the monthly payment of the mortgage. 

Having said this, it is important to be fully informed about all the costs involved in buying a home, preferably before you begin the house hunting process. Knowing in advance what these additional “costs” are, over and above the down payment that you might have, will help you plan for a smooth closing and avoid any unpleasant surprises. You should allow at least 1.5% of the purchase price for closing costs although we recommend approximately 2% to be on the safe side. So, what are the different types of closing costs when buying a house in Ontario?

Legal fees. A lawyer will charge a fee for their professional services involved in drafting the title deed, preparing the mortgage, and conducting the various searches. 

Land Transfer Tax. There is usually a land transfer tax that is charged on closing when the property is transferred to your name and it can vary depending on the price of the home, whether or not you are a first time home buyer and which city you live in Ontario. 

Mortgage insurance.  You should budget for insurance on your new home. Insurance costs can include default mortgage insurance, homeowners insurance, mortgage life insurance and title insurance. If you borrow more than 80% of the purchase price of the property, mortgage insurance is most likely required. Mortgage insurance is to protect the lender against you defaulting on the loan. The mortgage insurance is paid by you, but the insurance policy is to protect the financial company, not the purchaser. Mortgage insurers in Canada include CMHC, Genworth Financial, and Canada Guarantee.

Property Appraisal. If your lender requires an appraisal report to be completed, it will have to be done before they hand over any mortgage money. An appraisal provides the lender with a professional opinion of the market value of the property. It is usually required for new homes. Often the home builder will pay this fee and factor it into the purchase price. It is more common to require an appraisal when there is no Mortgage Insurance involved.

Home inspection. Most Realtors recommend that you obtain a home inspection and make your offer to purchase subject to an acceptable inspection. A home inspection can reveal problems with the property such as mold, mildew, structural problems, electrical problems, infestations or problems with the HVAC system. The cost is paid by the buyer. 

Land Survey Fees – A land survey is a process where a surveyor will inspect the property to ensure that boundary lines in the title to the property are being followed. Using the legal description of the property and specialized surveying instruments, the surveyor will measure the land and note the boundary lines. If the land survey is out of date, the lender may require a new survey. Usually, a financial company will accept a recent survey. 

Property tax.  At the time of a sale, the lawyer for the buyer must confirm that local taxes have been paid up to date. If they are, a Tax Certificate is issued, from which any adjustments can be made – usually requiring the buyer to compensate the seller for any prepaid taxes. If they are not up to date, the municipality requires that the seller pay them off from the proceeds of the sale. Therefore, remember that if the previous owner has prepaid property taxes or other utilities for the year, they will be credited the prepaid portion on closing. 

These are some of the potential fees related to closing costs on a real estate property.  However, there may be additional costs. Feel free to contact us to learn more about closing costs or to best calculate them prior to closing.