What Are Closing Costs in a Residential Real Estate Deal?

Understanding Closing Costs in Ontario: The True Cost of a Real Estate Deal

When buying or selling a home in Ontario, many people focus on the price of the property itself, but there’s much more to the final transaction than the purchase price alone. Closing costs—those final fees you’ll need to settle on the day you take possession of a property—can catch many buyers and sellers off guard if they aren’t fully prepared. These costs are essential for transferring ownership and include a mix of legal fees, taxes, and other administrative charges. Let’s take a closer look at the typical closing costs in a residential real estate deal in Ontario, so you know exactly what to expect.

What Are Closing Costs? A Quick Overview

At the most basic level, closing costs refer to the expenses and fees associated with the final transfer of a property from the seller to the buyer. They can vary depending on the details of the transaction, including whether you’re buying or selling, the value of the property, and the location. While both buyers and sellers incur closing costs, buyers typically face higher closing costs, especially in areas like land transfer taxes. These expenses are over and above the down payment for the buyer or the commission for the seller.

It’s important to budget for these costs early on to avoid surprises on closing day. Generally, buyers should estimate closing costs at around 1.5% to 4% of the purchase price. Let’s break down the most common types of closing costs for both buyers and sellers in Ontario.

Common Costs for Buyers

1. Land Transfer Tax One of the biggest closing costs for buyers in Ontario is the Land Transfer Tax (LTT). This tax is calculated based on the purchase price of the home and varies depending on the region. In Ontario, the LTT is a provincial tax, but if you’re purchasing a property in Toronto, you’ll also need to pay a municipal land transfer tax in addition to the provincial LTT.
   • Ontario Land Transfer Tax Formula:
     • 0.5% on the first $55,000
     • 1.0% on the amount between $55,000 and $250,000
     • 1.5% on the amount between $250,000 and $400,000
     • 2.0% on the amount between $400,000 and $2,000,000
     • 2.5% on amounts above $2,000,000
   • First-Time Homebuyer Rebate: First-time buyers may qualify for a rebate of up to $4,000 on the Ontario LTT, and if purchasing in Toronto, an additional $4,475 rebate is available for the municipal tax.
2. Legal Fees and Disbursements Buyers are required to hire a real estate lawyer to handle the legal paperwork associated with the property transaction. This includes reviewing the Agreement of Purchase and Sale, conducting a title search, and ensuring the proper transfer of ownership. Legal fees typically range from $1,000 to $2,500, depending on the complexity of the transaction. In addition to the lawyer’s fee, disbursements are expenses paid to third parties (e.g., title searches, registration of documents) and can add several hundred dollars to the total cost.
3. Title Insurance Title insurance is an optional but highly recommended purchase for buyers. It protects against any future claims or defects in the property’s title (e.g., undisclosed liens or title fraud). The cost of title insurance is a one-time premium and typically ranges between $250 and $400, depending on the value of the property.
4. Home Inspection Fee Many buyers choose to hire a professional home inspector to evaluate the condition of the property before finalizing the deal. This can help identify any issues or potential repairs that may not be visible during a regular showing. The cost of a home inspection in Ontario typically ranges from $400 to $600, depending on the size and location of the property.
5. Property Insurance Most lenders require buyers to obtain property insurance before the closing date, protecting the home against damage or loss (e.g., fire, theft). The cost of property insurance varies based on the value of the home, location, and coverage, but typically ranges from $800 to $1,500 annually.
6. Mortgage Insurance If you are putting down less than 20% of the purchase price as a down payment, you’ll need to obtain mortgage default insurance (also known as CMHC insurance). The cost of this insurance is based on the size of your down payment and is typically rolled into your mortgage payments. However, some lenders may require an upfront payment, which can range from 2.8% to 4% of the mortgage value.
7. Prepaid Property Taxes and Utility Adjustments In some cases, the seller may have prepaid property taxes or utility bills for a period after the closing date. The buyer is responsible for reimbursing the seller for these prepaid amounts, which are prorated based on the closing date. These adjustments can range from a few hundred to several thousand dollars, depending on the property and its location.
8. Appraisal Fee If you are financing your purchase with a mortgage, your lender may require an appraisal of the property to confirm its market value. The appraisal fee is typically paid by the buyer and can range from $300 to $500.

Common Costs for Sellers

1. Real Estate Agent Commissions For sellers, the largest closing cost is usually the real estate agent’s commission. In Ontario, commission rates typically range from 3% to 5% of the sale price and are usually split between the buyer’s and seller’s agents. The seller is responsible for paying this commission, which is deducted from the proceeds of the sale.
2. Legal Fees Like buyers, sellers must also hire a real estate lawyer to handle the legal side of the transaction. This includes reviewing and finalizing the Agreement of Purchase and Sale, discharging any mortgages or liens on the property, and transferring the title to the buyer. Legal fees for sellers are generally lower than for buyers, typically ranging from $800 to $1,500.
3. Mortgage Discharge Fee If you have a mortgage on the property being sold, your lender may charge a discharge fee to close the mortgage account. This fee can range from $200 to $400, depending on your lender.
4. Mortgage Prepayment Penalty If you are selling your home before the end of your mortgage term, you may be subject to a prepayment penalty. This penalty is often based on the remaining balance of your mortgage and the interest rate differential (IRD). It’s important to check with your lender to understand any potential penalties you may face.
5. Adjustments for Property Taxes and Utilities Like buyers, sellers are responsible for paying any property taxes and utility bills up to the closing date. If these amounts have been prepaid, they will be adjusted in the final closing statement.

Other Costs to Consider

1. Moving Costs Whether you’re buying or selling, don’t forget to budget for moving costs. The cost of hiring professional movers in Ontario varies depending on the distance and size of the move, but can range from $1,000 to $3,000.
2. HST on New Homes If you’re buying a brand-new home or condo in Ontario, be aware that HST (Harmonized Sales Tax) is applicable on the purchase price. In most cases, the builder will include the HST in the sale price, but it’s important to confirm this in the Agreement of Purchase and Sale. There are also HST rebates available for certain new home purchases, which can reduce the total cost.
3. Condo Fees and Status Certificate For buyers purchasing a condo, there may be additional closing costs, such as condo fees (which may be prepaid by the seller) and the cost of obtaining a status certificate. A status certificate provides important information about the condo corporation’s financial health and any potential legal issues. The cost for a status certificate in Ontario is typically $100.

Closing Costs: Be Prepared

Closing costs are an essential part of any real estate transaction, and it’s crucial to be fully aware of these expenses before you buy or sell a property in Ontario. For buyers, closing costs generally range from 1.5% to 4% of the purchase price, while sellers must factor in real estate agent commissions and legal fees. By understanding the full scope of these costs, you can better budget and prepare for your real estate transaction, ensuring a smooth and successful closing.

While the exact closing costs will vary depending on the specifics of your transaction, it’s always wise to work closely with your real estate lawyer and real estate agent to ensure that all costs are accounted for. Being financially prepared for closing costs can make the difference between a stress-free closing and last-minute surprises.