Purchasing real estate in Ontario can be an exciting and daunting task, and to many individuals, it may be the largest and most significant financial transaction they may undertake in their lifetime. The process includes identifying your dream home and closing the deal, and involves different types of costs. Calculating the amount of the down payment can be not quite straightforward for the first-time homebuyer or inexperienced real estate investor.
The most important cost considerations that must be kept in mind prior to purchasing any real property in Ontario:
Cost Structures
Property prices are based on numerous factors including: location, size, local market and economic trends, your method of financing, features and amenities, property age and much more. These prices determine the down payment that must be initially paid upfront which represents a portion of the total purchase price. The rest of which is to be paid through other means of mortgage financing.
When the purchase price is $500,000 or less, the minimum down payment is 5%. For purchase prices above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. A 20% down payment would meet the minimum amount required to avoid paying mortgage loan insurance. As part of your initial payments on the property purchase price, a buyer is required to pay a deposit. This sum is usually reflective of how serious you are as a buyer and is variably advised by your real estate agent.
First-time home buyers are also provided with various other tax credits and financial incentives to purchase real estate. The Canada Revenue Agency (CRA) allows individuals to make a tax-free withdrawal of up to $35,000 from their Registered Retirement Savings Plan (RRSP) and reallocate it towards a down payment. The Government of Canada also has a First-Time Home Buyer Incentive Program which offers 5% of the purchase price of an existing home and 5 or 10% of the purchase price of a newly constructed home through a shared-equity mortgage. Through this, you will become a co-owner of the property and undertake a smaller mortgage in exchange for the government owning some equity in your home. You are required to repay the incentive after 25 years, or when you sell the property.
Land Transfer Tax
In Ontario, you are subject to Land Transfer Tax (LTT) when you purchase a house, condominium unit, or vacant land. The tax rate increases in a tiered basis with the purchase price. Payment of this tax is due upon title transfer and is calculated in the following way:
Purchase Price of Home Marginal Tax Rate
First $55,000.00 0.5%
$55,000.01 to $250,000.00 1.0%
$250,000.01 to $400,000.00 1.5%
$400,000.01 to $2,000,000.00 2.0%
Over $2,000,000.00 2.5%
Property sales in the Greater Toronto Area are also subject to the City of Toronto’s municipal land transfer tax, in addition to the provincial land transfer tax. This is a charge on all home purchases within the boundaries of Toronto. First-time home buyers may qualify for an LTT rebate of up to $4,475 on their Municipal Land Transfer and up to $4,000 on their Provincial Land Transfer Tax. Please click here to calculate the applicable LTT per your desired location.
Legal Fees and Costs
Legal costs vary in every transaction. Real estate lawyers are responsible for conducting title searches, acquiring title insurance, registering your name on title, producing a Statement of Adjustments, and facilitating any other financial transactions on closing day.
Registration of title is the process of transferring the seller’s name to yours. On the other hand, title insurance is intended to protect the buyer from any liability in the event of any undetected title defects. These can arise from violations of municipal zoning bylaws, existing work orders, property taxes in arrears, or encroachments on adjoining property. Both title insurance and registration fees are paid on closing day.
Legal closing costs can vary based on the complexity of each transaction and normally range between $1,000 to $2,000 for residential properties.
Real Estate Broker Fees
In Ontario, the average combined real estate broker commission fees range from 3.5% to 6% of the total selling price which is split between the buyer and seller’s agent. The buyer usually is subject to a fixed rate of commission, approximately 2.5% on average, whereas the seller’s rate is variable depending on the rate that has been negotiated between them and the listing agent. As a buyer, you are not paying your agent directly as they are paid by the seller. For this reason, it is uncommon for the buyer agent fees to be negotiated although your agent may be willing to provide a cash-back rebate as a buyer incentive.
Mortgage and Lender Fees
In the event your down payment is less than 20% of the purchase price, your mortgage provider will arrange a mortgage default insurance. This amount will be added to the total mortgage amount, but may also be paid in full upon closing. The estimated cost varies between 0.6% to 6.5% of the loan amount. Keep in mind that the specifics vary from transaction to transaction. However, you must have at least 1.5% of the purchase price allocated for closing costs in addition to your down payment in order to qualify for the insurance.
If your mortgage is not ready for renewal, you may also face additional costs for breaking its term. Depending on the financial institution and your mortgage product, you may pay 3 months of interest penalty or the amount of the interest rate differential. It is best to reach out to your lender and inquire as to the charges that would apply if you were to break your mortgage term.
Overall, purchasing a home can be an overwhelming experience for most people without the right professionals guiding you at every step of the journey. Selecting the right real estate broker and lawyer can can provide for a smooth closing and a peace of mind. Your real estate lawyer should be able to provide you with comprehensive and dependable legal advice to protect your rights, money and assets. Good understanding of real estate transactions, and not mechanical following of processes, helps make the deal more efficient. That is why at Arra Law Firm, we work promptly and professionally and communicate effectively with all involved persons to ensure your closing goes smoothly.
For more information, please get in touch with our real estate team.
