If you're considering buying or selling a home in Ontario, there are a number of costs that you should be aware of. This is an overview of some of the key expenses associated with real estate transactions in Ontario, including land transfer tax, legal fees, and other costs that you may need to consider. By understanding these costs upfront, you can better plan for the financial aspects of your real estate transaction and ensure that you're prepared for the expenses involved. Whether you're a first-time homebuyer or a seasoned property investor, this information will be useful in helping you navigate the costs of buying and selling real estate in Ontario.
Costs Involved in a Purchase
The Down Payment
When purchasing property, the buyer is required to pay at least a small percentage of the total purchase price from their own savings or non-refundable gifts from family. The minimum contribution amount is determined by the purchase price of the home. If the purchase price is less than $500,000, the buyer will need to provide at least 5% of the purchase price as a down payment. If the purchase price is greater than $500,000 and less than $1 million, the buyer must contribute 5% of the first $500,000, and 10% of all amounts greater than $500,000. If the purchase price is greater than $1 million, the buyer must contribute at least 20% of the purchase price.
Mortgage Default Insurance
If you are contributing less than 20% of the purchase price as a down payment and borrowing the remainder from a major bank, you will be required to purchase mortgage default insurance (also called mortgage loan insurance). Your lender may also require mortgage insurance if you have poor credit history or if you are self-employed. The cost of the insurance is paid either as part of your mortgage or in full upfront, and is calculated as a percentage of the value of your mortgage, somewhere between 0.6% and 4.5%. You will also pay HST on the total cost of the insurance premium.
Mortgage Broker Fees
If you retained a mortgage broker to find your lender, they may charge fees for their services directly to you, rather than being paid by the lender. These fees will be disclosed either as part of the mortgage commitment, or in a separate agreement between you and your broker. If the topic is not brought to your attention, be sure to ask your broker about their fees before you sign anything with them.
Legal Fees and Disbursements
Your lawyer will charge fees for their services, including reviewing your Agreement of Purchase and Sale, conducting a title search, preparing documents and witnessing your signature on documents required to effect the purchase, receiving and transferring funds, and registering documents on title. Disbursements are costs your lawyer pays on your behalf that you then pay them back for. In some cases, the disbursements can add up to as much as the legal fees, so be sure to prepare your budget with this in mind.
Title Insurance
If you are funding your purchase with a mortgage, you will likely need to obtain title insurance, which provides coverage for a number of issues that will affect your and your lender’s interest in the property. The title insurance premium is a one-time fee paid upfront when you purchase the property, and provides coverage for as long as you own the property. The amount paid for the premium is generally based on the purchase price of the property, but normally does not exceed $2,000 for the average home. If your property has title issues, the premium may be increased.
Fire, Flood, and General Liability Insurance
This is the insurance you are probably most familiar with, covering accidents or damaging events that affect the property’s structural integrity or cosmetic value, as well as your liability for issues that befall visitors to your property. You will have to arrange insurance that names your lender as a loss payee before your lender will provide the funds you need to close the transaction. This type of insurance has ongoing premiums that may increase if you make claims. The cost is generally based on an inspection of the property and the appraised value of the home.
Land Transfer Tax
In Ontario, land transfer tax is paid when property is transferred from one owner to another. This tax is calculated based on the value of the property being transferred, and the amount due will depend on various factors such as the location of the property and the type of property being transferred.
To calculate land transfer tax in Ontario, you will need to first determine the value of the property being transferred. This value is generally based on the purchase price of the property, although it can also be based on the property's value as determined by an independent appraiser. Once you have determined the value of the property, you can use the following formula to calculate the land transfer tax:
0.5% on the first $55,000
1.0% on the amount exceeding $55,000 up to $250,000
1.5% on the amount exceeding $250,000 up to $400,000
2.0% on the amount exceeding $400,000 up to $2,000,000
2.5% on the amount exceeding $2,000,000
For example, if you are purchasing a property in Ontario for $300,000, the land transfer tax would be calculated as follows:
0.5% x $55,000 = $275
1.0% x $55,000 = $550
1.5% x $190,000 = $2,850
In this case, the total land transfer tax would be $3,675.
It's important to note that there are exemptions and rebates available for land transfer tax in Ontario, so you may be eligible to pay less than the amount calculated using the above formula. For example, first-time homebuyers in Ontario may be eligible for a full rebate of the land transfer tax, up to a maximum of $4,000. You should consult with a lawyer or other qualified professional for more information about land transfer tax exemptions and rebates in Ontario.
Costs Involved in a Sale
Mortgage Payout
Generally the largest expense. If you have a mortgage that has not been fully paid out at the time of your sale, you will be required to pay the outstanding balance in full, as well as any applicable prepayment penalties if you are breaking your mortgage before the maturity date. You will likely also be charged a discharge fee, and may also be charged by your lender for preparing the discharge statement, which indicates the full amount your lender requires to remove the mortgage from title.
Realtor Commission
If you sell your property with a Realtor, or if your buyer uses a Realtor to find your property and prepare their offer to purchase, you as the seller are responsible for paying Realtor commission to any Realtors involved in the transaction, whether they act for you or for the buyers. Keep this in mind when you are examining offers to purchase. Commission is typically charged as a percentage of the purchase price, generally between 4% and 5%, and is subject to HST.
Legal Fees
Your lawyer will charge fees for their services, including reviewing your Agreement of Purchase and Sale, responding to issues identified by the buyer’s lawyer during their title search, preparing documents and witnessing your signature on documents required to effect the sale, receiving and transferring funds, and registering documents on title. Disbursements are costs your lawyer pays on your behalf that you then pay them back for. In some cases, the disbursements can add up to as much as the legal fees, so be sure to prepare your budget with this in mind.
Payouts for Rental Appliances
If you rent any large appliances, such as a furnace, water heater, or air conditioner, the corporate owner may have received your permission to register the value of the unit against title to your home. In many cases, homeowners are not aware that they have granted the appliance owner permission to register this interest against the property, and only discover the issue when the time comes to sell the property. If the Agreement of Purchase and Sale does not specify that the buyer has agreed to assume the rental contract, the seller may be obligated to pay out the value of the appliance, which is oftentimes inflated beyond the manufacturer’s suggested retail value.
In Summary
It is important to recognize that there are costs associated with buying or selling a home besides the obvious ones like providing a down payment on a purchase or paying your Realtor on a sale. Each property transaction is unique, so there may be additional costs that relate specifically to yours. With the help of a real estate lawyer, you will get clarity on the costs associated with your closing and assurance that the closing is done properly. At Doormat, we’ll provide you with a clear summary of costs and a digital platform where you can access everything related to your closing, all in one place.
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