What Closing Costs
Should I Expect?

For Buyers

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.

In addition to the balance of your down payment, which is your full down payment less the deposit you submitted with your 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 and various disbursements such as government registration fees.

Legal Fees and Disbursements

Most competitive real estate lawyers have established fixed fees for various standard services, including disbursements, and can provide you with 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 it's based upon the property's fair market value.

In Ontario, land transfer tax is typically paid by a buyer, and is calculated as a percentage of the purchase price of the property. 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%.

So, for an Ontario home with a fair market value of $300,000, your provincial Land Transfer Tax would be $2,975.

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.

So, a Toronto property valued at $300,000 would have a combined LTT/TMLTT of $5,700.

As of July 31, 2010, property transfer taxes varied considerably across the country. Using the same $300,000 fair market value example, 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, I suggest you speak with your own REALTOR® or lawyer. Or you can check your provincial or state website.

Typical Adjustments

At the time of closing your 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 of time after closing, must be credited back to them. If the seller has been paying the taxes through their mortgage company (who pay the taxes in larger payments), a substantial credit may be due the seller. This surprise could certainly upset your budget. No one wants a last minute scramble for additional funds. Not a great experience.

As a new home owner, you'll be responsible for any property tax installments that become due following closing. So, be prepared by calling the city before closing to inquire about tax payment dates.

In the case of a ...

Brand New Home

... the builder will charge a similar adjustment, but the property taxes it pays are substantially lower because they're based on land value only. So, the credit due is usually smaller.

If your new resale home is heated by oil, 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 (em>Ontario New Home Warranty Program, water metre installation, hydro hookup, landscaping, grading deposit and possibly municipal levies. So, be prepared.

HST

Ontario real estate purchases are sometimes subject to the Harmonized Sales Tax (HST). For brand new home purchases, builders typically include this generally unpopular tax in the purchase price. Substantially renovated homes may also be HST taxable, so be wary. If you're buying a country home with acreage, all of the land, less a small amount in the immediate area of the house, may also be subject to HST. Check with your accountant or tax lawyer prior to submitting an offer, for their opinion on this potentially expensive issue.

CMHC

If your down payment is under 20% of the purchase price, your mortgage is referred to as a high ratio mortgage, rather than a conventional mortgage, and is typically insured by Canada Mortgage and Housing Corporation (CMHC).

Don't confuse mortgage insurance with an insured mortgage. There's 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 you must pay the premium, which 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 remember - without this program, you'd be unable to buy a home without a substantial down payment. And saving a large down payment is not an easy thing to do these days.

Lender Adjustments

And here's another possible addition to your closing costs. While not applicable to every bank or trust company, some mortgagees (lenders) deduct from their mortgage advances, possibly substantial adjustments such as an interest adjustment and tax hold-backs.

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. So, if you close in the middle of the month, the interest for those first 2 weeks of possession may be added onto your closing costs.

Regarding tax hold-backs - when you're required, or choose to pay your municipal property taxes with your mortgage payment, the lender may want to set up a large tax account well in advance of the next payment to ensure sufficient funds are on hand to pay the property taxes on time.

In the event 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. So, the government really won'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 closing cost challenge for you on closing or afterward.

Mortgage Broker Fee

If you have special financing requirements, you may need the services of a mortgage broker. And they may charge an additional fee, possibly added to your closing costs, to reflect the extra effort expended on your behalf. Learn more about the services provided by a mortgage broker by visiting their website at Canadian Association of Accredited Mortgage Professionals.

Buyer Agency Commission

Though not typical, a buyer agency commission may also be added to your closing costs. This will depend upon the terms of the buyer agency agreement between you and the brokerage representing you, the agreement of purchase and sale, and the commission offered to the cooperating brokerage (buyer agent) by the listing brokerage. Please see the article on buyer agency for more details.

For Sellers

With the exception of real estate commission, closing costs for sellers are usually considerably lower than for buyers, simply because the buyer pays the land transfer taxes.

The most significant cost for a seller is the REALTOR® commission that must be paid on completion of the agreement of purchase and sale. This cost will depend upon the commission rate or flat fee agreed upon and contained in the listing agreement between the seller and the listing brokerage. It may also be subject to any adjustments made during negotiations of the sale contract. Typically, this fee includes any commission that may be payable to the cooperating (buyer) brokerage.

And, of course, one mustn't forget the Harmonized Sales Tax (HST) that must be charged on the commission and collected by the brokerage.

So, be prepared. It's impossible to calculate here the exact amount of closing costs you'll realize because every situation will most assuredly be different.

Nobody likes surprises on moving day.