You’ve got your financial ducks in a row. You’ve got your down payment together. You’ve got the paperwork you think you might need to get pre-approved for the mortgage you want but, are you prepared for the extra closing costs?
What are closing costs?
Closing costs are a couple of extras that you might not have thought about yet but, are going to need to make sure you have extra cash set aside for when you purchase the new home you’ve been hunting for. These, in a nutshell, are the costs it takes to seal the deal and finish dotting the i’s and crossing the t’s of your real estate purchase to “close” the deal.
How much are closing costs typically?
That depends on the price of the home you’re buying. Closing costs can be anywhere from 1.4% to 4% of the purchase price depending on how you go about it.
To help you put your budget together here is a quick list of the closing costs you are likely to run into:
Land transfer tax
When you buy land in Ontario, you have to pay a transfer tax to change the records essentially from one person to the other. The cost of land transfer tax in Ontario is:
$1 – $55,000 = 0.5% LTT
$55,001 – $250,000 = 1% LTT
$250,001 – $400,000 = 1.5% LTT
$400,001 & over= 2%
If you want to learn more about land transfer tax, check out this blog.
Legal fees and Disbursement
Your legal fees are the costs you’ll pay to lawyers typically to take care of the paperwork of your real estate purchase and title search. They can range depending on whether you use a local lawyer or if you opt for an online legal service. If you do opt for an online service, make sure you do your research and thoroughly check them out before trusting a virtual lawyer to look after your best interests legally.
This is required to make sure that the property doesn’t have any issues when it comes to the legal deed of the property and its history. Typically costs are between $100 – $300 when you hire your real estate lawyer or a notary to take care of this for you.
If you want to learn more about title insurance check out this blog.
PST on CMHC
If your down payment is less than 20% of the purchase price you’ll need mortgage insurance like CMHC and you may have to pay the PST (provincial sales tax) on the insurance ahead of closing the deal. The actual mortgage insurance you pay monthly through your mortgage payment. It’s just the tax you usually have to pay upfront.
Before you can close your home purchase you need to have insurance in place to ensure it’s protected if anything were to happen, and it needs to take effect the day before the home closes to make sure there aren’t any gaps between the previous owners and yourselves. The cost of insurance will depend on the property and your deductibles just like how your car or pet insurance might vary in cost.
Pre-paid Utility Bills
Some utility bills might have been paid quarterly in advance of the full period of time that the payment covers by the previous owners. So, they’ll want you to pay them back for the amount they have paid in advance that covers the time that you will own the house instead of them. For example, a water bill paid quarterly to the city covers 3 months of the year, and the current owner might move out at the end of that first month, meaning you’ll be on the hook for the remaining 2 months that they pre-paid.
Similar to utility bills some home owners like to pay their property taxes quarterly or even once a year so that the payment is out of the way. If that’s the case, you’ll need to pay them back whatever the amount is that they have paid for in advance, which covers the costs you would have incurred instead of them once you move in. For example, if the property tax is $1500 a year, and they have paid up the property taxes until December 31, but you take possession of the house July 1, you’ll need to pay them back 6 months’ worth of the taxes. A little quick math: $1500 / 12 = $125 per month x 6 months = $750.
As you can see, there is a few more numbers involved with preparing to buy a home than calculating what your down payment and monthly mortgage payments would be. That’s why it’s always a good idea to outline a detailed budget for yourself in advance so that you know exactly how much you need to have set aside in savings for your purchase as well as how you’ll save that money leading up to the purchase. Savvy home owners even include how they plan to manage to make the payments in the months after purchasing a house too. If you would like to take a deeper dive into the numbers and get a little help setting up a budget for your next real estate purchase, give me a call at 705-315-0516. I’m not just your friendly, neighbourhood mortgage broker, I’m your financial partner too!