As well as being unaware of typical closing costs when they set out
to buy a home, many first time home buyers are unfamiliar with real
estate terminology in general. Well, here's a primer.
In addition to the balance of your down payment, which is the full down payment less the deposit submitted with the offer, be prepared for additional expenses on completion of your purchase. These are commonly referred to as closing costs. Typically, they include lawyer's fees, land transfer tax(es) and various disbursements such as government registration fees.
Most competitive real estate lawyers and closing services have an established fixed fee schedule for various standard services, including disbursements, and upon request, will usually provide an estimate of closing costs anytime.
If you plan to buy real estate in Canada, you'll be required to pay a 'Land Transfer Tax' (LTT) or 'Property Transfer Tax' (PTT) to the provincial Ministry of Revenue/Finance. The calculation formula varies from province to province, but is based on the property's fair market value (FMV).
In Ontario, LTT is typically paid by the buyer and is calculated as a percentage of the property purchase price. Here's the current formula for Ontario as of this writing:
The first $55,000 is taxed at 0.5%, the next $195,000 at 1%, the next $150,000 at 1.5% and the remaining $250,000 at 2%.
For an Ontario home with a FMV of $500,000, for example, the provincial LTT is $6,475. For property within the City of Toronto, you'll also be hit with an additional tax called the Toronto Municipal Land Transfer Tax (TMLTT). This very unpopular tax is calculated as follows:
The first $55,000 is taxed at 0.5%, the next $345,000 at 1%, plus an additional 2% on the balance over $400,000.
A Toronto property valued at $700,000 would have a combined LTT/TMLTT of $20,200. A tidy sum, indeed. One would really want to live in Toronto to pay this burdensome taxation.
As of July 31, 2010, property transfer taxes varied considerably across the country. Using a FMV of $300,000, the following tax would be payable in each of the named locales:
Ontario, Toronto - $5,700, Nova Scotia (Halifax county) - $4,500, British Columbia - $4,000, Manitoba - $3,150, Prince Edward Island - $3,000, Quebec - $3,000, Ontario (outside of Toronto) - $2,975, Newfoundland - $1,250, Saskatchewan - $915, New Brunswick - $805, Yukon - $750, Northwest Territories - $490, Alberta - $335, Nova Scotia (outside Halifax county) - $150
Newly constructed homes may be exempt, in part or in full, from this tax for a first time home buyer. For details, speak with your agent or lawyer, or check your provincial or state website.
At the time of closing a resale home purchase, certain typical adjustments are made (added) to the amount payable.
Municipal property taxes are adjusted as of the completion date. Any portion of taxes prepaid by the seller for any period after closing must be credited back to the seller. If they've been paying their taxes through a mortgage company (which pays taxes in larger installments), a substantial credit may be due the seller. Such a surprise could certainly upset a buyer's fragile budget. No one wants a last minute scramble for additional funds.
As a new homeowner, you'll be responsible for any property tax installments that become due following closing. Thus, be prepared by calling the city before closing to inquire about tax payment dates.
In the case of a newly-built house, the builder will charge a similar adjustment, but the property taxes it pays are substantially lower because they're based on land value only. Thus, the credit due is usually smaller.
If your new resale home is heated by oil (which is increasingly unlikely these days with the proliferation of natural gas), the seller will usually have the tank filled prior to closing, and the cost of the full tank is added to your closing costs and credited to the seller on closing.
Buying a brand new home from a builder, particularly on the builder's own real estate contract, can involve more adjustments than on a resale purchase.
Brand new home closing costs can include the enrollment fee for the Ontario New Home Warranty Program, water meter installation, hydro hookup, landscaping, grading deposit and possibly municipal levies. Be prepared.
Ontario real estate purchases are sometimes subject to Harmonized Sales Tax (HST). For brand new home purchases, builders typically include this unpopular tax in the purchase price. Substantially renovated homes may also be HST taxable. If you're buying a country home with acreage, all of the land, less a small area immediately surrounding the house, may also be subject to HST. In such cases, I suggest you check with your accountant or tax lawyer prior to submitting an offer.
If your down payment is under 20% of the agreed purchase price in the purchase agreement, the resulting mortgage is referred to as a high ratio mortgage rather than a conventional mortgage, and in Canada, is typically insured by Canada Mortgage and Housing Corporation (CMHC).
Don't confuse mortgage insurance with an insured mortgage. There's a significant difference. An insured mortgage protects the borrower against default as a result of loss of life or disability. Mortgage insurance, on the other hand, protects the lender against default by you. But in both cases - you guessed it - you must pay the premium. In the case of mortgage insurance, the premium is added to the mortgage principle and amortized over the life of the mortgage. Added to this premium is the HST, plus an application fee, both of which are payable on closing.
It might seem an unfair expense, but without this program, you'd be unable to buy a home without a substantial down payment. And saving a lot of cash is no easy task these days.
Here's another possible addition to your closing costs. While not applicable to every bank or trust company, some mortgagees (lenders) deduct sometimes substantial adjustments from their mortgage advances, such as an interest adjustment or a tax hold-back.
An interest adjustment refers to interest calculated from the closing date to the interest adjustment date, which is usually the first day of the next month following closing. Most mortgage payments are made on the first of the month. Therefore, if you close in the middle of the month, the interest for those first 2 weeks of possession may be added to your closing costs.
Regarding tax hold-backs; when you're required or choose to pay the municipal property taxes with your mortgage payment, to ensure sufficient funds are on hand to pay the property taxes on time, the lender may want to set up a large tax account well in advance of the next official payment date.
If you default on the mortgage, the lender must protect its position because even if they hold the first mortgage, which for example, would have priority over a second mortgage, the municipality has absolute first priority for recovering any property tax arrears. The government doesn't lose. Surprised?
This hold-back could amount to 6 month's taxes. Or the lender may insist that you pay the installments due after closing for the balance of the year, with the lender making the installments beginning the following year. In either case, this policy can lead to a cost challenge for you on closing or afterward.
If you have special financing requirements, you may need the services of a mortgage broker. To reflect the extra effort expended on your behalf, they may charge an additional fee, which would be added to your closing costs. Learn more about the services provided by a mortgage broker by visiting their website at Mortgage Professionals Canada.
Though not typical, a buyer agency commission may also be added to your closing costs. This depends on the terms of the Buyer Representation Agreement (BRA) between you and the brokerage representing you, the Agreement of Purchase and Sale (APS) and the commission offered to the cooperating brokerage (buyer agent) by the listing brokerage. Please see the article on buyer agency for more details.
With the obvious exception of real estate commission, closing costs for sellers are usually considerably lower than for buyers, simply because the buyer pays the land transfer tax(es).
The most significant cost for a seller is the real estate commission that must be paid on completion of the APS. This cost will depend on the agreed commission rate or flat fee contained in the listing agreement between the seller and the listing brokerage. It may also be subject to adjustments agreed to during negotiations of the APS. Typically, this fee includes any commission that may be payable to the cooperating (buyer) brokerage.
And, of course, one mustn't forget the HST that must be charged on the commission and collected by the brokerage.
Be prepared. Nobody likes surprises on moving day. Keep it organized!
Visit Canada Mortgage and Housing Corporation (CMHC) for more information on closing costs and other assorted expenses involved in home acquisition.
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