Published: July 20, 2012 • Last updated: October 8, 2019 at 0:29 am
Some first-time home buyers are blindsided by closing costs when they get to their lawyer’s office on the big day. This article provides a brief explanation of each significant closing cost item.
Land Transfer Tax: On most home purchases, this is your biggest single closing cost expense. The Land Transfer Tax (LTT) in Ontario is calculated using a sliding scale where you pay .5% on the first $55,000 of the purchase price all the way up to 2% on any amount exceeding $400,000 (details). First-time home buyers are eligible for a refund of up to $2000 (details).
Toronto Land Transfer Tax: Toronto residents pay an additional Municipal Land Transfer Tax, which on a $500,000 home would result in an additional tax owing of $5,725 (details). First-time home buyers are eligible for a rebate of up to $3,725, which is usually claimed for you by your lawyer when registering the deed (details).
High Ratio Insurance: If your down payment is 20% or less than the property’s purchase price, your mortgage is called ‘high-ratio’ and most lenders will require that you purchase mortgage default insurance. The cost of this insurance is based on a sliding scale that ranges from .5% to 2.75% of the mortgage amount (on standard applications) and you are allowed to add it to your mortgage balance. However, PST (8% in Ontario) must be paid separately and on the closing date.
Legal Fees and Disbursements: Your lawyer will perform a series of tasks, such as reviewing the Offer to Purchase, performing a title search, registering the deed and mortgage, reviewing your mortgage contract, preparing the closing documents, paying out any disbursements, etc. Costs can vary widely but you should expect to pay in the range of $1000 to $2,000 depending on what is involved in the transaction.
Closing Adjustments: In all likelihood the seller will have made payments, such as property taxes and condo maintenance fees, that cover a period that goes past the selling date. Closing adjustments are paid by buyers to sellers to refund any over payments, and while amounts can vary, an estimate of $1,000 for these adjustments is reasonable.
Interest Adjustment (IA): This is an interest-only charge by your lender to cover the time between when your mortgage is funded and when the term of the mortgage begins. For example, if your closing date was on May 23rd and your mortgage term commenced on June 1, your adjustment would be for 8 days. IA costs vary by closing date and payment frequency and your mortgage agent can find out the exact amount of your charge ahead of time. A reasonable budgeting estimate would be anywhere from $200 to $1000.
Fire Insurance: Fire insurance is mandatory for anyone requiring a mortgage and the coverage must be at least equal to the mortgage amount or the building value, whichever is greater. While this insurance can be paid for monthly, proof of coverage is required at closing.
Status/Estoppel Certificate: For condo purchasers only. This document outlines the condominium corporation’s financial and legal affairs. By rule, the charge for this certificate cannot exceed $100.
PST on High Ratio Insurance: Provincial sales tax (8% in Ontario) will be charged on high ratio insurance fees and must be paid upfront at closing (borrowers can add the insurance fee itself to their mortgage balance).
HST on New Home Purchases: While new home purchases that close after July 1, 2010, are subject to HST, all new home buyers qualify for a rebate which is calculated by lowering the provincial sales tax applied on the first $400,000 of the purchase price to 2% (resulting in a maximum rebate of $24,000). In some cases, builders are now including HST in the purchase price so be sure to clarify who pays before your closing date. (For details on the HST New Housing Rebate program, click here.)
Title Insurance (optional): While Title Insurance is not required, we strongly recommend that you buy it because it protects you against a wide range of risks, including fraud, forgery and title defects to name just a few. In addition, having Title Insurance eliminates otherwise required steps such as acquiring an up-to-date land survey (aprox. $1000) and a Compliance letter (aprox. $100). To learn more about Title Insurance, contact your real estate lawyer or ask us and we would be happy to recommend one. You should estimate a cost of approximately $250 for a $500,000 home and add $1 for every additional $1000 of the purchase price for this coverage.
New Home Warranty Program premiums: New home builders in Ontario are required to buy warranty coverage for each home they build, through Tarion Corporation. The coverage is good for one year and while many builders include the cost of this coverage in the sale price, some charge the premium back to the buyer separately as a part of the disbursements at closing. The cost is calculated as portion of the purchase price and provincial and federal taxes are applied. As an example, the New Home Warranty premium for a $500,001 home would be $1,299.50 (For details on the New Home Warranty program, click here.)
Ross Taylor is a full-time mortgage agent and credit specialist. If you are purchasing, refinancing or renewing your mortgage, contact Ross or fill in the contact form to obtain the best available rates and terms.
Thanks to David Larock for his article on the above subject