Toronto closing costs: An educational guide

Many first-time homebuyers may be unaware of the fees associated with buying a home in Toronto. The final bill might seem high, but it can be easy to understand if you break down the legal fees and expenses. We have compiled a guide that includes details about the closing costs associated with a home purchase.

Closing costs are the expenses paid by homebuyers upon completion of the purchase process. They are over and above the property price and are not included in the purchase price listed by sellers. In Toronto, closing costs are approximately 1.5% to 4% of the purchase price. Homebuyers are legally obligated to pay this amount when the purchase deal closes. Some other expenses associated with a home purchase are:

Deposit is the initial amount paid to the seller upon signing. This amount acts as a down payment specifically for an Offer to Purchase. Homebuyers must know the payment structure beforehand and preserve a written agreement. If you are buying an under-construction condo, in some cases, you can request the builder to break the deposit into multiple parts to create an affordable payment schedule. Doing so can also ease up the burden of closing costs on your finances. Making a deposit proves a buyer’s willingness to purchase the house, and it’s also a sign of their financial reliability. It shows the seller that the buyer can handle the extra expenses and risks associated with the condo’s construction.

The land or home inspection fee is a part of the closing costs. Many lenders request you to call an inspector to conduct a land survey or home inspection. It is a part of the condition of the Offer to Purchase. The inspector can charge anywhere from $500 to $2000 to write a report on your property’s condition.

Down payment is the upfront amount paid to purchase a house. Homebuyers pay a minimum down payment of 5% for a home costing $500,000 or less. For homes costing between $500,000 and $999,999, buyers must pay 5% of the first $500,000 and 10% for the remaining amount. All homes valued over $1 million need a minimum down payment of 20%. Homebuyers making a down payment of less than 20% are required to purchase mortgage default insurance. While insurance costs vary with the province, it ideally stays between 0.5% and 2.5% of the purchase price.

An appraisal determines the estimated value of a home. It assures the lender that the price paid by the buyer is at par with the home’s market value. In case you default on the mortgage, the lender has an idea of the certified resale value of the house. Usually, homebuyers pay the appraisal fee.

Property tax is mandatory and can fluctuate according to the area, type of house, neighborhood, and more. Mortgage lenders take into account the property tax during the qualification process. As a part of the closing costs, homebuyers need to know the tax breakdown for accurate budgeting. Property tax is charged yearly.

The local municipality determines the property tax value. It is a percentage of your home loan and a part of your GDS (gross debt service ratio). Lenders use your GDS to evaluate how much of your income can cover monthly housing expenses. A ratio up to 39% increases your chances of qualifying for a mortgage. Your debt service ratio is also a part of this calculation. The lender assesses it to check the percentage of your income that goes into paying off your debts. These can be credit card payments, student debts, car loans, and more. A ratio of up to 44% will increase your chances of getting approved.

LTT or Land transfer taxes are a crucial part of the closing costs in Toronto. Although they are levied on resale homes, some provinces charge it on new homes as well. When it comes to closing costs, buyers need to pay the Toronto land transfer tax (TLTT) and Ontario land transfer tax (OLTT). The tax amount depends upon the home’s value and ranges from 0.5% to 2.5% for each category.

Homebuyers need to hire a lawyer for the final settlement of closing costs before signing the Offer to Purchase. Just like for any long-term, expensive purchase, asking for a lawyer’s advice can save you the trouble of legal matters. A lawyer can help:

• Protect your rights
• File your paperwork
• Hand over the keys after you finalize the deal
• Ensure seamless monetary transactions

The lawyer can also help you find title insurance. This document is legal proof of your ownership of the house. Lawyers can charge anywhere from $500 to $1000 to help you with the purchase process. The fee structure depends on the number of tasks the lawyer undertakes.

You can choose to hire professional packers and movers to help relocate your belongings to your new home. Many factors add to your moving costs, such as the vendor, distance between the locations, moving urgency, and more.

If you own a house, make sure to purchase a policy to protect it. If this is your first time purchasing property insurance, make sure to add fire and other property damage clauses to your contract. You can also add furniture, expensive electronics, and other insurable interior products to your policy. Make sure to shop around and find an insurer who can give you the best value for your money. Having insurance can help you receive partial compensation for any property damages.

Toronto closing costs depend on several legal factors. Each of them is crucial in helping you move closer to legally owning and moving into your new home. Knowing about them can also help you budget better.

Further Reading

When buying a home in Ontario, don’t forget about closing costs

Mortgage Maestro can help you find a mortgage solution that fits your budget.