Closing Costs Ottawa Real Estate
Closing costs: What they are and how to budget for them
When you purchase a property, the day you officially take possession is known as the closing or completion date. It’s also the day when some costs associated with finalizing the purchase of real estate come due, so it’s smart to be prepared and budget for these costs.
What are closing costs?
The number and amount of closing costs varies depending on location, type of property being purchased, and many other factors. Closing costs are usually laid out for you in a final letter from your lawyer detailing the work they have done for you. These are the most common costs you’ll incur when finalizing a property purchase:
Land transfer tax
This is a one-time tax paid by the property buyer in Canada, at the time the buyer takes possession of a property. The amount of land transfer tax is based on the purchase price of the property. This page [https://www.ontario.ca/document/land-transfer-tax/calculating-land-transfer-tax] shows you how to calculate the amount of land transfer tax you will pay when purchasing a property in Ontario.
Legal fees
Buyers generally work with a real estate lawyer who prepares and files the legal documents that finalize the purchase of a property. Fees for this service are due on your closing date.
Pro-rated property taxes
Sometimes a property owner will pay their property taxes upfront for the entire year or a part of it, so if you take possession of the property before the next tax bill is due, you will need to pay the previous owner a pro-rated amount of that tax for the remaining period covered by their payment.
Pro-rated water/sewer costs
As with property taxes, sometimes the previous owner will have paid water or sewer costs in advance; you will need to reimburse them for the period of time remaining before the next bill is due.
Deed and mortgage registration and title search
Your lawyer will register a Deed of Transfer with the provincial land registry office and will also register your mortgage. This process requires a title search to ensure there are no encumbrances (liens) on the property you are purchasing. There are fees associated with all of these processes.
Title insurance
The legal term "title" refers to your ownership of a property. Title is registered in a provincial land registry. You can buy title insurance anytime while you own a property, but I recommend doing it at the time of purchase. Title insurance protects you against title fraud, errors in surveys or records, unforeseen defects in your title ownership, unpaid liens, and encroachments on neighbouring properties. Read more about why you should buy title insurance (link to title insurance blog).
Other costs
You may incur a number of other costs just prior to your closing date; these should be budgeted for in the same manner. They can include home inspection fees and the deposit you pay to the seller when your offer to purchase is accepted.
How much do I need to budget for closing costs?
Most mortgage lenders and real estate lawyers suggest that buyers set aside somewhere between two and four percent of the purchase price for closing costs. I lean to the conservative side when budgeting for closing costs, and recommend setting aside three percent of the purchase price. And if it turns out you don’t need all of those funds, you’ll have extra money in the bank, which can be very helpful when moving.
The bottom line
Buying a property is a complex transaction and there are multiple costs associated with its completion. Budgeting an adequate amount for closing costs will save you a lot of worry and ensure that your closing date goes smoothly—so you can celebrate and focus on the future.
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