A Purchaser's Guide to Real Estate Closing Costs

Closing costs are an essential and unavoidable component of any real estate transaction, which is of particular importance when purchasing a property in Ontario. These costs can vary significantly, and they depend on several factors such as the purchase price and location. Whether you are a first-time homebuyer or a seasoned investor, this blog post will provide valuable insights to help understand the overall cost of purchasing a property in Ontario.

While the purchase price of a home typically comprises the largest expense in a transaction, homebuyers must also budget for additional closing costs, which are essential financial obligations. If these costs are not understood prior to presenting an offer to purchase a home, it may result in financial challenges, delays, and potentially even the termination of the entire transaction, which has significant consequences.

Some of the most common closing costs that are not a part of the purchase price include, but are not limited to, lawyer fees and disbursements, registration costs, provincial and municipal land transfer tax, and title insurance.

#1 Lawyer Fees, Disbursements, Registration Costs

Your real estate lawyer will play a crucial role in the successful closing of your purchase, and their fees will be a part of your closing costs. These fees will be for services provided by your real estate lawyer, such as reviewing the agreement of purchase and sale and if applicable, the status certificate, conducting searches, inspecting title, arranging for title insurance, preparing mortgage documents, reviewing mortgage instructions, facilitating the transfer of funds, reporting to the purchaser and the bank, and preparing / registering closing documents.

In addition to legal fees, your real estate lawyer will also incur of out pocket expenses, which are called disbursements. Common disbursements include execution and title searches, bank charges, law society transaction levy surcharges, tax certificates, registration costs, software charges, courier, and title insurance.

It's important to consult with a real estate lawyer to obtain a quote for legal fees and approximate disbursements for accurate financial planning.

#2 Land Transfer Tax

Land Transfer Tax is usually the second largest closing cost (the first one being the purchase price). These taxes are imposed on all purchase transactions, and the payable amount depends on factors such as the purchase price, property location, and the purchaser's status (e.g., first-time homebuyers may be eligible for rebates or exemptions)

Ontario’s Land Transfer Tax is calculated based on the property value. The first $55,000.00 is taxed at 0.5%, amounts exceeding $55,000.00 and up to and including $250,000.00 is taxed at 1%, amounts exceeding $250,000.00 and up to and including $400,000.00 is taxed at 1.5%, the remaining balance up $2,000,000.00 is taxed at 2%, and the balance greater than $2,000,000.00, is taxed at 2.5%.

As an example, if the property being purchased is $500,000.00, the breakdown for Ontario Land Transfer Tax is as follows:

-          First $55,000.00: $55,000.00 x 0.5% = $275.00

-          $55,000.00 to $250,000.00: $195,000.00 x 1% = $1,950.00

-          $250,000.00 to $400,000.00: $150,000 x 1.5% - $2,250.00

-          $400,000.00 to $500,000.00: $100,000.00 x 2% = $2,000.00

In this example, the purchaser would pay a total of $6,475.00 in Ontario Land Transfer Tax

If the property being purchased is located in Toronto there is an additional Municipal Land Transfer Tax.

It is important that all purchasers are aware of what they will be paying in Ontario Land Transfer tax and Toronto Land Transfer Tax, if applicable, prior to presenting an offer to purchase property.

#3 Title Insurance

Title insurance is incredibly important for all purchase transactions. Although it is technically not mandatory, most banks will require it if they are providing a mortgage. The purpose of title insurance is to protect the purchaser and lender against certain unforeseen issues with respect to the property’s title, such as encroachments, fraud, and arrears.

Summary

Understanding and planning for closing costs is crucial for a smooth and successful real estate transaction. While the purchase price of the property is significant, it's equally important to account for additional expenses such as lawyer fees, disbursements, registration costs, land transfer taxes, and title insurance. Failing to anticipate these costs can lead to financial complications, delays, or even the termination of the deal. By familiarizing yourself with the various closing costs and seeking guidance from a real estate lawyer, you can navigate the purchasing process with confidence and ensure that you are fully prepared for all financial aspects involved.

For a consultation, please call 905-412-2288, e-mail ppatel@pmplaw.ca, or visit www.pmplaw.ca for more information.