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Wednesday, February 29, 2012

How home closing costs can add up

 Home buyers are often advised to set aside one-to-three per cent of the purchase price of their house for closing costs.  These fees are explained during the home buying process, but it is helpful to ask questions so you fully understand how these costs can affect  your budget.

Legal fees: On average you should budget $600 to $900 for legal fees and an additional $200 to $400 for disbursements, which includes registering the mortgage, completing a tax certificate, and doing a title search on the property.  On top of that you may pay administrative fees for postage, faxing and photocopying.
Shop around. Some law offices specialize in handling mortgage disbursements and offer cheaper rates.  Ask your bank or mortgage broker which law firm they recommend and then call at least 3 other lawyers for quotes.  A few phone calls can save you hundreds of dollars.  I paid $810 for legal fees and disbursements - the next best quote was over $1,000.

Related: Never buy a house without a home inspection

Property tax adjustment: If you buy an existing home, the previous owners have paid property taxes to the City.  On closing, you will be required to reimburse them for the taxes they have prepaid for the year. 
For example if the previous owners paid $2,000 in property taxes for the year and you took possession of their home on June 30, you will be required to pay the owner half the pre-paid taxes, or $1,000.

Interest adjustment Date: Depending on the date chosen by your lender as the interest adjustment (the date the mortgage starts) you may be required to pay interest from the closing date until your interest adjustment date.  The maximum amount would be one month’s interest at the rate of your mortgage.
For example, our mortgage was advanced when we took possession of our home on August 15.  We owed an interest-only payment from the advance date until September 1, which was our interest adjustment date.  Our first full mortgage payment came out on October 1.

While it may sound like you get some reprieve by skipping a monthly mortgage payment, most people want to start eliminating this debt as quickly as possible.

Land Transfer Tax: In general, if you buy land or an interest in land in Ontario, you must pay Ontario's land transfer tax, whether or not the transfer is registered at one of Ontario's land registry office.
Land includes any buildings, buildings to be constructed, and fixtures (such as light fixtures, built-in appliances and cabinetry). The land transfer tax payable is normally based on the amount paid for the land. If you are a first-time homebuyer, you may be eligible for a refund of all or part of the tax.


Calculation of Land Transfer Tax
  • 0.5% of the value of the consideration up to and including $55,000,
  • 1% of the value of the consideration which exceeds $55,000 up to and including $250,000, and
  • 1.5% of the value of the consideration which exceeds $250,000, and
  • 2% of the amount by which the value of the consideration exceeds $400,000 for land that contains at least one and not more than two single family residences.
  • On July 1, 2010, Ontario introduced a federally administered Harmonized Sales Tax (HST) that applies to most purchases and transactions. The HST applies to newly constructed homes, but does not apply to resale homes. Buyers of new homes will receive a rebate of up to $24,000 regardless of the price of the new home.
Title Insurance: Title insurance does not replace the role of the lawyer. It simply provides an added level of protection for the purchaser(s). Ontario lawyers still must search title and certify the status of title before a title insurance policy can be issued.  For a one-time premium ($150 - $299), the policy protects the purchaser(s) and mortgage lender against losses suffered from matters set out below as well as other matters more specifically outlined in the policy:
  • defects that would have been revealed by an up-to-date survey
  • survey errors or illegibility of survey
  • encroachments (before or after closing)
  • contravention of municipal zoning by-laws
  • unmarketability of title
  • defects in the title
  • invalidity or unenforceability of the mortgage on title
  • liens
  • easements (other than usual easements for utilities, etc.)
  • contravention of subdivision, development and other agreements
  • priority of certain construction liens
  • priority of unregistered easements and rights of way
  • fraud or forgery (prior to and after closing)
  • solicitor error, omission or fraud
  • unpaid property taxes or local improvement charges by a prior owner

Hidden costs can make it difficult to stick to a budget, especially for a first time home buyer.  Be sure to ask your Broker in advance for a detailed description of all your closing costs so they are factored into your overall budget.

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