Understanding Closing Costs: A Complete Guide

When purchasing a home, many buyers are surprised to learn that the purchase price is only part of the financial picture. In addition to your down payment and mortgage, there are several other expenses that must be paid before you officially take possession of the property. These expenses are known as closing costs, and they can add up quickly if you are not prepared. Understanding what these costs are and how much you should budget will help ensure that the process of buying your home is smooth and without financial surprises. Closing costs are the collection of fees, taxes, and expenses required to finalize your real estate transaction. While the exact total will vary depending on the property and location, most buyers should set aside between three and five percent of the purchase price to cover these costs.

1. Land Transfer Tax 

One of the largest expenses you will encounter at closing is the Land Transfer Tax (LTT). This is a provincial tax that is calculated on a sliding scale based on the purchase price of your home. For example, on a property valued at $700,000, the Ontario Land Transfer Tax would be approximately $10,475. First-time homebuyers in Ontario may qualify for a rebate of up to $4,000, which can significantly reduce this cost. If you are purchasing a home in Toronto, be aware that you will also need to pay an additional Municipal Land Transfer Tax (MLTT), which effectively doubles this expense.

2. Legal Fees and Disbursements 

Hiring a real estate lawyer is not optional in Ontario; it is a crucial step in the process. Your lawyer will review the purchase agreement, complete title searches, handle the transfer of funds, and register the property in your name. Legal fees typically range from $1,200 to $2,000, plus HST. On top of this, you will also be responsible for disbursements, which include expenses such as title searches, courier fees, and registration charges. These usually cost between $200 and $400.

3. Title Insurance 

Title insurance is a one-time cost that protects you and your lender from potential issues related to the property’s title, such as fraud, ownership disputes, or errors in public records. In Ontario, title insurance is commonly arranged through your lawyer

4. Home Inspection 

Although not a legal requirement, a home inspection is highly recommended, particularly for resale properties. An inspection provides insight into the condition of the home and can identify any issues that may require repair. Skipping an inspection can be risky, even in competitive markets.

5. Appraisal Fee 

Most lenders require an appraisal to confirm that the property’s value is in line with the agreed purchase price. This protects both the lender and the buyer by ensuring the loan amount is appropriate. In some cases, the lender may cover this fee, but buyers should be prepared to pay it themselves.

6. CMHC Insurance Premiums 

If your down payment is less than 20 percent of the purchase price, you will need to obtain mortgage default insurance through the Canada Mortgage and Housing Corporation (CMHC) or a similar insurer. The premium for this insurance is added to your mortgage. However, the provincial sales tax on the premium, which in Ontario is eight percent, must be paid in full at closing.

7. Adjustments for Taxes and Utilities 

Closing day often involves adjustments between the buyer and seller for prepaid expenses such as property taxes, utilities, or condominium fees. For example, if the seller has already paid annual property taxes in full, the buyer may need to reimburse them for the portion of the year that they will own the home. These adjustments vary depending on the property and time of year, but they can add several hundred dollars to your closing costs.

8. Moving Expenses 

Beyond legal and government-related costs, buyers should also plan for the practical expenses of moving. Whether you hire professional movers or rent a truck, the costs can add up quickly. Setting up utilities and services in your new home can also create additional expenses. It is wise to budget at least $1,000 for these logistical costs.

Closing costs are a significant part of the home-buying process, but they are also entirely manageable with proper preparation. Buyers should start saving for these expenses early and avoid using all available cash on the down payment alone. Consulting with a real estate professional or lawyer early in the process can provide a personalized estimate based on the property you are considering. If you are a first-time buyer, make sure to explore rebate programs that may reduce your financial burden.

By planning ahead and having a clear understanding of what to expect, you will be in a stronger position to enjoy your new home with confidence and peace of mind.