Common closing costs you should know about

I’m buying a new home and I want to make a budget. What closing costs should I know about? November is financial literacy month in Canada, so it’s a great time to make sure you understand the costs involved with buying a home.

You’ll encounter three categories of expenses: pre-closing costs, closing costs and after-closing costs.

A home inspection isn’t mandatory, but it’s money well-spent in the pre-closing phase. Getting a home inspection from a qualified home inspector, engineer or contractor can often help you avoid major, expensive problems later.

Before they agree to provide financing, your mortgage lender might require you to pay for an appraisal or survey of the property to confirm the value of the home. I recently went through this process myself. It was somewhat unexpected, so it’s important to be aware it could happen.

It’s also a good idea to involve a real estate lawyer early, particularly if you’re buying a newly constructed home. A lawyer can review the agreement of purchase and sale before you sign it to identify unexpected costs that you’ll have to pay to the builder. This can include development fees, extra funds for a condo’s reserve fund and so on.

Closing costs typically make up the biggest chunk of the additional buying expenses. In Ontario, the land transfer tax applies at up to 2 per cent of the purchase price. If you’re in Toronto, an additional land transfer tax of up to 2 per cent applies as well.

You’ll also need to pay legal fees to handle the various documents and contracts. Your lawyer will also do a title search on the home to ensure the seller can actually sell the home and there are no liens against it, and they will register the deed and mortgage for you.

And depending on how property tax, utility payments and condo maintenance fees are scheduled, you might need to refund the seller for fees they have paid in advance.

There are also three different insurance policies related to closing expenses. You will need to obtain home insurance before your lender will release the funds. You may want to get title insurance to protect yourself against title fraud, errors in surveys and encroachment issues with neighbours.

If your mortgage down payment is less than 20 per cent of the sale price, you’ll need to buy mortgage insurance as well.

There are a number of additional costs you could face if you’re buying a newly constructed home. First, it will be subject to HST of 13 per cent. Although you might be eligible for rebates from the Ontario and federal governments, you need to pay it up front.

New homes are covered by a warranty program administered by Tarion. Sometimes the Tarion enrolment fee is included in the purchase price, but other times it may be due at closing.

On top of that, for newly built condos, you might end up paying “phantom rent” during the period after you’ve moved in, but before the condo is registered and handed over to the condo corporation. Again, something I experienced with the purchase of my first home. It took some explaining for me to understand this at the time.

The after-closing costs include moving costs, utility hook-up fees, renovations and repairs, as well as any new decorations, appliances and so forth. If the property has an oil tank, the seller usually has to fill the tank, and the buyer may have to pay a pro-rated amount for the oil that the seller didn’t consume.

This list is not exhaustive, but it covers the most common expenses you might pay. By understanding the likely costs beforehand you’ll be better prepared to budget for buying your home.

RECO has created a special online guide that talks about the unique issues faced by first-time homebuyers. You can find it at reco.on.ca/ firsttimebuyer. Joseph Richer is registrar of the Real Estate Council of Ontario (RECO). He oversees and enforces all rules governing real estate professionals in Ontario. Email questions to askjoe@reco.on.ca. Find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at youtube.com/RECOhelps

The after-closing costs include moving costs, utility hook-up fees, renovations and repairs, as well as any new decorations, appliances