July 12, 2024
There are various financial complexities that come with a home purchase. Understanding the associated costs is crucial in determining the steps you should take in your real estate transaction. This article provides a comprehensive overview of closings costs, including mortgage and property-related fees. These costs can add up quite quickly, so it is important to educate yourself of these costs before stepping into a real estate transaction.
Closing costs are the administrative and legal fees associated with a real estate transaction. These costs can vary significantly depending on the property’s location, mortgage loan amount, and the mortgage provider. Here is a brief closing cost breakdown to provide you with a little homebuyer assistance.
Title insurance: If you intend on purchasing your property with a mortgage, one of the conditions in your mortgage commitment will require that you obtain a title insurance policy. This is a one-time fee paid at closing and the policy remains active throughout the duration of your home ownership.
Land Transfer Tax: This tax is payable for any purchase of real estate, including condominiums, cooperative apartments, and vacant land in Ontario and other provinces. The amount of the tax increases as the purchase price increases. Some cities, such as Toronto, also have a municipal Land Transfer Tax.
Home inspection fee: The buyer is expected to cover the cost of home inspection. Home inspection is not required but it is highly recommended as they often reveal major structural issues that the buyer should be aware of before completing the transaction. These issues are usually not simply noticed by walking through the house with a realtor.
Survey fee: Mortgage lenders typically require a land survey to be presented by the seller to the homebuyer. If a survey exists, it will be handed over to you by the seller. This is a map of a property’s boundaries outlining the beginning and end of a property’s borders. If the seller does not have a survey, the homebuyer may be required to pay for one.
Legal fees: These fees cover services such as title searches, contract reviews, and document preparation, which are provided by the real estate lawyer. They vary depending on the complexity of the transaction and the expenses involving title insurance, land registry fees, and courier fees that the lawyer incurs while representing you on the transaction.
Homeowners Insurance: Securing home insurance coverage is vital for your property. It is essential for you to obtain home insurance coverage effective as of the proposed closing date and it is a necessary cost for closing. If you are obtaining a mortgage, your lender’s interest as first loss payee must be noted on the property. Prior to closing, we must receive a copy of your policy or binder letter.
Pro-rated property taxes: When buying a new home, your lawyer will confirm that all of the seller’s expenses have been covered up until the closing date, including property taxes. If the seller is not up-to-date with the property taxes, they must pay the outstanding balance to the municipality. However, if the seller is ahead and paid the taxes for the year, the buyer must reimburse the seller for the amount paid between the closing date and end of the prepaid period.
Home appraisal fee: A conventional mortgage requires the order of an appraisal on the home being purchased. This mortgage-related fee is for lenders to verify that the property you are securing a mortgage against is worth the value being paid for it. By conducting an appraisal, lenders can provide you with accurate loan estimates. Going forward, any mortgage refinancing done on the property would be subject to a home appraisal fee as the value of any home changes over time.
PST on CHMC-insured premium: CMHC (Canada Mortgage and Housing Corporation) Insurance protects lenders if borrowers ever default on their mortgage. This is required if you are not able to make a down payment of 20% or more on the home you wish to purchase. This cost is added to your mortgage and paid over the course of the mortgage loan. However, there is a Provincial Sales Tax (PST) associated with CHMC that must be paid for upfront. In Ontario, the PST on CHMC Insurance is 8%.
For example, if the CHMC Insurance Premium is $6200 with the 8% tax rate in Ontario, the PST owed would be $496. This would be paid on closing day.
This article provides you with a concise summary of some of the general costs associated with the purchase of a home. However, there may be fees subject to your particular real estate transaction. On the day of closing, your lawyer will guide you through the Statement of Adjustments as well as the Trust Ledger Statement, which will provide you with an accurate picture of the costs associated with your transaction.
The statement of adjustments outlines a list of debits of amounts already paid (such as the deposit) and a list of credits (such as the purchase price and prepaid fees on the property). The credit column subtracted from the debit column provides you with the amount owed to the seller on the closing date.
The trust ledger takes the amount you owe to the seller and outlines how the amount is allocated. The list of credits includes the loan amount from the lender and your down payment. The list of debits outlines where all of that money is going and how it will cover the different closing expenses.
Buying a home is a significant life decision and it is important that buyers do not walk into this decision blindsided. Navigating the closing costs associated with purchasing a home can be complicated, which is why you require the expertise of a real estate lawyer to guide you through the process. At Bradshaw & Mancherjee, we provide you with the support and knowledge you need to make informed and confident decisions about the purchase of your home.
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