You’ve successfully navigated the market, your offer has been accepted, and your deal is firm. The excitement is building as your closing date approaches. While the biggest financial component—your down payment—is top of mind, many first-time buyers are surprised by another significant financial hurdle they must clear: closing costs.

Closing costs are a collection of one-time fees and expenses that must be paid on or by the closing date to complete the purchase of a property. These costs are separate from and in addition to your down payment. Understanding and budgeting for them is a critical step in the home buying process to ensure a smooth and stress-free closing.

As a general rule of thumb, you should budget between 1.5% and 4% of the property’s purchase price for closing costs. Here is a detailed breakdown of what those costs include.

1. The Big One: Land Transfer Tax (LTT)

For most buyers in Ontario, this is the single largest closing cost. It’s a tax levied by the provincial government on every property purchase.

  • Provincial LTT: Ontario uses a marginal tax system, meaning you pay different rates on different portions of the property’s value. The tax is calculated based on the purchase price.
  • Municipal LTT (Toronto only): If you are buying a property within the City of Toronto, you must pay an additional Municipal Land Transfer Tax. This effectively doubles this expense for Toronto buyers, making it an even more significant cost to budget for.

First-Time Home Buyer Rebates: Thankfully, there’s significant relief available. Various government programs for first-time homebuyers in Ontario provide substantial tax rebates:

  • The provincial rebate provides a maximum refund of $4,000.
  • The Toronto municipal rebate provides a maximum refund of $4,475. A qualifying first-time buyer in Toronto could be eligible for a total rebate of up to $8,475, which can dramatically reduce or even eliminate the LTT burden on lower-priced homes.

Legal Fees and Disbursements: In Ontario, you are required to hire a real estate lawyer to handle the closing of your transaction. Their services are essential and include:

  • Conducting a title search to ensure the property is free of liens or other legal issues.
  • Registering the new deed and mortgage with the government.
  • Facilitating the secure transfer of funds between you, your lender, and the seller.
  • Ensuring all legal documents are in order.

The cost for legal services, including administrative fees known as disbursements, typically ranges from $1,500 to $2,500.

Title Insurance: Title insurance is a policy that protects you and your lender against future losses related to the property’s title or ownership. This could include issues like title fraud, survey errors, zoning violations, or unpaid property taxes from a previous owner. While technically optional, virtually every mortgage lender will require you to purchase a policy. The cost is a one-time premium, generally ranging from $250 to $400 for homes under $1 million.

3. The Pay-Backs: Understanding Adjustments

Adjustments are costs that the seller has pre-paid beyond the closing date, for which you must reimburse them.

  • Property Tax Adjustments: This is the most common adjustment. For example, imagine the closing date is August 1st, but the seller has already paid their property taxes for the entire year. On closing, you will have to “adjust” by reimbursing them for the five months (August through December) that you will own the home.
  • Other Adjustments: Similar calculations are made for any other services the seller has prepaid, such as condo maintenance fees, utilities, or fuel if there is an oil tank. Your lawyer will calculate these adjustments precisely.

4. Other Potential Closing Costs

Depending on your situation, you may also need to budget for these expenses:

  • Property Appraisal Fee: Your mortgage lender may require an appraisal to verify the value of the property before approving your loan. This is often required during the financing condition period of a conditional offer. The cost is typically $300 to $500.
  • Home Inspection Fee: While you usually pay for the home inspection before the deal is firm, it’s another out-of-pocket expense to remember, typically costing $400-$600.
  • Tarion Warranty Fee (for New Builds): If you are buying a new construction home from a builder, you will have to pay an enrolment fee for the Tarion New Home Warranty program. The fee is based on the home’s price.
  • Moving Costs: Don’t forget the practical expenses of the move itself, including hiring a moving company, renting a truck, and setting up new utility accounts.

While your deposit forms part of your down payment, closing costs are an entirely separate cash outlay that you must have ready for your lawyer on the closing date. By understanding these costs and budgeting for them early, you can avoid any last-minute financial stress and focus on the excitement of getting the keys to your new home.