This article is part of Global News’ Home School series, which gives Canadians the basics they need to know about the housing market that they never learned in school.
Saving up for a downpayment and locking down the terms of a mortgage worth hundreds of thousands of dollars generally makes buying a home the biggest financial transactions of many Canadians’ lives.
But less publicized are the associated closing costs that crop up before you get the keys.
While these fees and taxes can be an afterthought, they can comprise thousands of dollars of extra costs. The good news for first-time buyers is that there are a few ways to get some of that money back.
Global News spoke to legal experts in Canadian real estate to get a sense of what funds first-time buyers should be setting aside for closing costs as they near a purchase, and what details often get overlooked in the process of sealing the deal.
“For a lot of the folks that we deal with, this is probably the largest transaction that they’re dealing with in their life,” says Dharam Dhillon, a B.C. real estate lawyer and partner at Wilson Rasmussen LLP and at Keystone Law Group.
Dhillon told Global News that it can be overwhelming for first-time buyers facing a mound of paperwork and fees that they’re wholly unfamiliar with. Starting the process of getting documents and funds in order as early as possible with a lawyer — at least two weeks before closing, he said, can help to ease the stress.
“The sooner we can get involved in that process, the easier it is to ensure that there aren’t any surprises before closing.”
Land-transfer taxes and the rebates you can expect
Among the most significant costs you’ll be asked to pay upon closing are land-transfer taxes, which come up anytime a property is changing hands.
The amount you’ll pay here varies depending on where you’re buying — Ontario has one set of land-transfer taxes, but there’s a second municipal amount if you happen to be buying in Toronto, for example.
In Ontario and B.C., transfer taxes are calculated at different, tiered percentages depending on the purchase price.
For Ontario homebuyers, the first $55,000 of the purchase price has tax applied at 0.5 per cent, anything exceeding that and up to $250,000 is then taxed at 1.0 per cent, and so on and so forth. There are some handy online calculators you can take advantage of to estimate how much you’ll owe here depending on where you’re buying and the final purchase price.
Using Ratehub.ca’s land-transfer tax calculator, a homebuyer in Ottawa can expect to pay $9,850 purchasing a home valued at $668,000 — the average national home price in Canada last month, according to the Canadian Real Estate Association. Someone purchasing the same valued home in Toronto would be required to pay twice that amount, however.
These costs can seem daunting for first-time buyers, but it’s here that newcomers to the property market can often catch a break with tax rebates on these amounts.
Ontario residents buying a home for the first time are entitled to $4,000 off their provincial land-transfer taxes, while Toronto residents can save a maximum of $4,475. Similar programs exist in other provinces. In B.C., transfer taxes can be waived as long as the property is valued at least than $500,000, with a few other caveats.
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Slonee Malhotra, a real estate and condo lawyer at Sorbara Law in Waterloo, Ont., notes that Canadians should be careful about the “first-time buyer” definition as they’re costing out transactions.
She tells Global News that the first-time buyer definition for land-transfer taxes doesn’t just apply to Canadian real estate. In order to meet the definition, a buyer must not have owned property anywhere else in the world. If your spouse owns their home or owned property for any period of time while you’ve been married and you make a purchase, you also won’t be considered a first-time buyer for those rebates.
There’s a first-time home buyer’s tax credit offered at the federal level, which allows qualifying buyers to claim up to $10,000 on their income taxes for the purchase of a qualifying property.
The definitions here are tricky, however. For instance, it doesn’t actually have to be your first time buying a home, as long as you didn’t live in a home you owned that year or in the preceding four years.
Other 'hard costs'
Malhotra says that even if first-time buyers are able to avoid paying hefty fees for property transfer taxes, there are other “hard costs” associated with a transaction that can pile up.
“In addition to your downpayment, put aside at least a couple thousand dollars,” she advises.
First and foremost, be prepared to pay your real estate lawyer for the myriad services involved in closing a transaction. Malhotra says that many lawyers will have a standard package with a flat fee for going through the typical real estate transaction, though some could charge an hourly rate. Expect to pay around legal fees $1,500 for a transaction that comes with “very few hiccups,” Malhotra says, adding costs on some deals can be higher.
Then, there are a few searches that need to be done to enable you to legally take possession of a home. This includes the title search and title insurance, which will see a firm run through the history of claims and liens put on the property to make sure the title is “clean” and clear for you to take ownership.
Dhillon notes there can be a few other taxes associated with closing a transaction. In the case of a new build, you’ll have to pay goods and services tax on the property, for instance, but properties valued at under $450,000 before tax are subject to partial rebates for GST.
Depending on the time of year you purchase, Dhillon says you will also be asked to sort out the property tax adjustment. This comes into play when a seller might’ve already paid up for the year’s worth of property taxes, and you may be charged a percentage of that amount to cover your share of the annual tax amount. In instances where you take possession and pay the property tax yourself, you could alternatively be owed an amount from the seller based on the amount of time they lived in the home as well.
In the case a new build, Dhillon says the property taxes will typically be paid up by the developer for the year. Upon closing, you’ll owe the developer for your share of property taxes for the year, with your first direct bill coming the year after close.
While the various costs associated with these closing fees can be just a few hundred dollars each, Dhillon warns that they can add up quickly and potentially derail a transaction if a buyer doesn’t have the funds.
“The way those numbers calculate, they can be a material. So all of a sudden, if someone hasn’t accounted for that, they have to come up with that cash for closing,” he says.
Dhillon says that for 90 per cent of the transactions his firms deal with, amounts of $2,500-$5,000 should be sufficient for handling the disbursements associated with closing, aside from fees for land transfer and any other applicable taxes. More complicated transactions, or deals with quick turnarounds that require rush fees to handle the title search and necessary certificates, end up on the more expensive end of the spectrum, he says.
Some after-closing costs
Malhotra says that there are a few other legal and practical considerations for first-time buyers to keep in mind around and after closing to help protect their finances for the long term.
She notes that it’s increasingly common for young couples to get help from older family members with a downpayment, but that such gifts or loans should be given extra legal consideration before closing a transaction.
In a hypothetical instance, if parents were to give their son and his partner the money for a downpayment and that relationship were to fall apart, both purchasers could end up with a claim to equity from the home despite not having contributed equally, she explains.
Malhotra says that she takes it upon herself to ask difficult questions that young, excited homebuyers might not have considered about the possible end to a relationship to avoid pain should the worst-case scenario come to pass.
“I know it’s really awkward for people in relationships moving in together to bring up those subjects,” she says.
Also in preparation, Malhotra recommends buyers who are moving in together take the time to have a will drafted that will establish where assets will go should one or both of the new owners pass away.
For homes that are co-owned, title can be set up as either joint tenants or tenants in common. For the former, purchasers have equal rights property which would automatically pass from one owner to the other in the case of a joint tenant’s death. In contrast, tenants in common can decide on different percentages of ownership, which wouldn’t automatically go to other owners if one of them dies.
One of the priorities that ought not to go unchecked after getting the keys is changing the locks on your new home, Malhotra adds.
While it might’ve been stipulated that the old owner hands over all the keys in their position, she says it’s never certain how many keys are floating around out there that have been given to friends, family or neighbours.
Paying a locksmith to come by the house shortly after getting possession can be a crucial final cost for sleeping soundly in your new home, Malhotra says.
“The last thing you want to do is purchase this new property and then come down the stairs one morning to find that there is a stranger asleep on the couch and hasn’t realized that the previous property owners have moved out,” she says. “Believe it or not, I have had that happen before with clients.”
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