First Time Homebuyer Closing Costs
Recently, I bought my first home at the age of 22 – as promised, here’s my subsequent post in regards to the closing day. Fortunately, it went smooth, although I did get caught off guard with the closing costs.
These are additional costs related to closing your property (buying or selling). Closing costs can include, but not limited to: lawyer fees, real estate agent fees, and applicable taxes. Below is a breakdown of the costs paid in my case:
Development Charge Increase and Other Development Related Fees
Development charges (also known as development levies) are common among all pre-construction homes. My total cost for this item was $3120. This includes community tree planting, driveway paving, and water/hydro meter installation. Development charges are usually used towards the operational and capital expenditure budgets for the city. To avoid any pre-construction closing cost surprise, make sure there’s a cap on the development charges increases.
Here’s where the first time homebuyers’ credits are useful. My total tax bill was $4140. For pre-construction homes, there are two main types of taxes: land transfer taxes (municipal and provincial), and the Harmonized Sales Tax (HST).
Toronto area homes face a double whammy for land transfer taxes – paying taxes to both, Toronto, and Ontario. Homes outside of the Toronto area only pay for the Ontario land transfer tax. However, Toronto has the lowest property taxes in Ontario – which makes up for the double land transfer taxes upfront. For first time home buyers, the Ontario government provides a $4000 rebate towards the land transfer tax.
Since every situation is different, I recommend using RateHub’s land transfer tax calculator tool to find out the approximate amount you’d be paying. This is affected by two main factors: the municipality your house is in, and the purchase price of your property.
Pre-construction pricing (usually) includes HST (this detail is specified on the price list for the homes available for sale). Here’s a fun fact – developers collect the HST New Home Rebate on behalf of the homebuyers’ – the amount varies depending on the value of the home. Buyers usually get a discounted purchase price, because of the rebate being collected on their behalf. In my case, the HST rebate would have been $24,000. However, if the property wasn’t my primary residence and/or if I sold it under a year, I would have to pay $24,000 in taxes.
If I wasn’t a Canadian Citizen or Permanent Resident holder, I would have also been dinged with an additional 15% Non Resident Speculative Tax (NRST). This tax was recently introduced in the new Ontario Fair Housing Act. In most cases, if you’re a Permanent Resident holder or Canadian Citizen, using the property as your primary residence, the only tax you really have to worry about is the land transfer tax(es).
Tarion Warranty acts as a watchdog for pre-construction homes (and new construction homes, from a warranty perspective). My total cost for enrolling into the Tarion Warranty was $1040.
Tarion Warranty provides coverage for:
- Deposits made to the builder, prior to the construction of the home
- Coverage for condo elements (this applies to condominium projects)
- Protection against unauthorized substitutions
- Compensation for construction delays or occupancy
- Certain defects in work and material (one and two year warranties)
- Financial loss for contract homes
The cost of enrolment is related to the purchase price of the home. There’s an enrolment fee calculation table available, to help you determine the cost for enrolling into this program.
Unfortunately, I’m not even close to being done listing the closing costs. Choosing the right lawyer is extremely crucial for ensuring a smooth transaction on the closing day. My lawyer fees were $1600.
Lawyers act as the middle person between the buyer and seller – mainly responsible for transferring funds to applicable parties, and providing a statement of adjustments. This statement provides the exact breakdown of the purchase price of the property, closing costs, and any credits from the builder, and first time homebuyer credits.
How much is too much? This is where it gets tricky for many first time homebuyers. It typically costs $1200 – $1700 for legal fees. Shop for competitive rates and an experienced lawyer. Keep in mind, lawyers would help facilitate the situation if there were any deficiencies in the house and other closing day related problems.
Other (legal) costs amounted to approximately $2000. These items were also charged by the lawyer, and include the following:
- Government fee to register Transfer/Deed for Land
- Search title
- Search executions
- Conveyancer’s fee to search and close transaction
- Faxing disbursements, photocopies, & postage
- Bank charges
- Delivery charges
- Mortgage registration fee
- Title insurance policy
- 1st time homebuyer application and Ontario new regulation filing
There’s also Canadian Mortgage Housing Corporation (CMHC) insurance fees – if I were to do a downpayment of less than 20%, I would be dinged with an additional tax on the CMHC premiums paid. This tax cannot be financed into the mortgage, which is another reason why I tried my best to avoid doing less a 20% downpayment. CMHC premiums are relatively pricey, and these mortgages can only be amortized over 25 years (instead of the maximum of 30 years). This leads to slightly higher monthly mortgage payments.
RateHub also has a calculator for calculating CMHC fees – if I were to do a 10% downpayment, I would be paying an additional $14,675 (based on my purchase price of $526,000). On top of that, I would be paying an additional $1,174 in taxes for the CMHC mortgage insurance.
Many personal finance experts (i.e. Sean Cooper) recommend amortizing your mortgage over 30 years to lower your Total Debt Servicing (TDS) ratio. You can always make additional lump sum payments to make up for the lower monthly payments.
If I was selling a property, I would’ve had another cost for the real estate agent’s commission, which is approximately 3.5% – 5% on average.
My total closing cost was approximately $11,900. Luckily, I received a $7,500 Delayed Closing Compensation from the developer – which brought down my closing cost to approximately $4,400. Without the first time home buyer credits, and Delayed Closing Compensation, my closing costs would have been at least $23,000.
Closing on a property can be overwhelming for homebuyers, especially if you’re selling one property and buying another one on the same day. My main advice is to be prepared. Consult with your real estate agent and your lawyer to help you determine what you need, and how much is needed to help you prepare for your closing costs. My friend, Vivek Dani, who is a real estate agent (and founder of New Condo Releases) provided me with an excel spreadsheet of my closing costs – I found this to be extremely useful.
Home buying is always an exciting experience. If you have any questions, feel free to send me an email or comment below.
You May Also Be Interested In: How I Bought My First Home at the Age of 22
Writer: Jelani Smith
Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.