My mentor once dubbed condo closing costs “the bill served after Chinese buffet”. Buyers get off the high of closing on a condo and get hit with expenses that need cash payments. Unprepared buyers get the impression everyone is out to bleed them dry by shots of $100 here and $1,000 there. Usually, these are expenses they didn’t plan for but that could have been predicted.
There’s so many factors that go into a purchase that sometimes, looking past what happens after signing the doted line seems irrelevant.
Truth is, wrapping up a sale requires the contribution of many different professionals. And guess what, no one works for free. On top of that, local and provincial governments all charge taxes every step of the way.
In this article, we’ll go over the most common condo closing costs, how much they cost and at what time in the real estate transaction they are paid.
The king of closing costs: the down payment
The most emotional of closing costs. You’ve worked hard, scrounged and bootstrapped for months to get a down payment built up. You’re proud of it. Every time you log in to your bank account, you pat yourself on the back. Now it’s time to hand it over…
This is one of the largest fees, but once that has been handled, there are plenty more to consider.
For those buying pre-construction, down payments on new builds work a bit differently than for resale purchases. With new condo developments, there is a first deposit which gets applied to your down payment. But, the total sum isn’t always due at once. Depending on when the construction will complete, the remaining amount may be paid out over a few months or even a year. For example, a 20% deposit can be turned into four 5% payments.
Land transfer and ownership taxes in closing costs
These closing fees have many names: Land Transfer Tax, Ownership Tax or Welcome Tax. They all come down to the same idea: the government wants your money. Provincial and city governments insert themselves into the deal and take your money.
If this is your fist condo, some programs may exist that can help attenuate the final bill to pay. For most, there’s usually no way around these taxes.
Land transfer taxes constitute a considerable expense as they are based on your property value. They also can’t be rolled into your mortgage meaning you’ll need to pay them in cash at the time of closing.
For example, let’s look at a condo purchase based on Toronto’s average cost of $352,000. You’d pay about $3,240 for the Toronto Land Transfer Tax, not to mention the provincial portion of $3,750. That’s almost $7,000!
As we mentioned above, first-time home buyers are entitled to substantial credits. In some instances, this can be up to $4,000. If you file your taxes yourself, be sure to check for that option in your software. If you use an accountant, remember to let him or her know of this expense.
The land transfer tax is paid at the time of closing with the lawyer or notary.
Builder’s warranty fees
When you buy consumer items, manufacturing defects are usually covered by a warranty. A similar setup exists for newly built residential structures in Canada. These are new home warranties and protect you against construction defects. They are a one-time fee that cover a set period of time.
Unfortunately, these warranties vary by name and coverage in each province. If you want a good resource that explains it clearly, you can consult this article.
The main thing to remember with builder’s warranties is that they are usually included in the sale price of a new condo. This means that it can be added to your mortgage. If you decide to buy a new or pre-construction condo, make sure to see this line in your signing documents. There should be a clear entry for the new construction’s warranty.
In rare instances where buyers need to pay for the warranty themselves, the final bill can be costly. For example, in Ontario this is the Tarion Warranty. Fees for a condo valued between $300,000 and $350,000 are $802.30. If this cost wasn’t rolled into the sale price, you’ll be asked to pay this cash at the time of closing.
The sneakiest of closing costs: CMHC tax
Condo buyers who can’t put 20% or more on their down payment will have to pay a mandatory insurance premium to the Canadian Mortgage and Housing Corporation (CMHC). This is a mandatory mortgage default insurance. Luckily, the CMHC insurance can be rolled into the mortgage. This makes paying the hefty premium more bearable as its amortized over the life of your mortgage. CMHC provides a calculator to help homebuyers estimate their premium.
The provinces of Manitoba, Ontario and Quebec figured it’d be a good way to make a few extra dollars by adding a tax on the CMHC. In those jurisdictions, the CMHC insurance is taxable and cannot be added to the loan amount. This little detail adds a few hundred dollars to your closing costs. Here’s an example:
Condo final purchase price: $275,000
Down payment: $30,000 (approx. 11%)
Amortization: 25 years
CMHC Premium: $7,595
Tax on CMHC Premium:
Quebec (9.975%): $757.60
Ontario (8%): $607.60
Manitoba (7%): $531.65
As we mentioned earlier, this extra tax can’t be rolled into the mortgage and needs to be paid at the time of closing.
This is an often misunderstood closing costs because not every home buyer needs to pay it. Essentially, it’s the amount of interest you aren’t paying between your closing day and the day your first mortgage payment comes out. Here’s an example to make the concept easier to understand:
Let’s say your closing date is set for September 15th. However, your payment schedule is set so that the bank does the first debit on October 1st. That’s 15 days you had possession of the condo and didn’t pay for it. Even though you’re not scheduled to pay until October 1st, interest still accrues the minute you took possession of the property. The bank will want that money up front.
Using this schedule as an example with a mortgage of $300,000 at 2.75%, here is how the interest adjustment would be calculated:
Interest on the mortgage : $300,000 x 2.75% = $8,250
Adjusted day to day: $8,250 / 365 days = 22.60 $/day
Interest adjustment: 22.60 $/day x 15 days = $339.04
The interest adjustment payment is usually paid in cash to the lender on closing date. In some circumstances, the lender may be able to deduct the amount directly from your bank account. In rarer situations, you can have the lender tack it on to your first mortgage payment.
Prepaid property taxes and condo fees
This is another variable closing cost dependent on the move-in date. Like the interest adjustment, the amount to be paid depends on the moving date. Depending the municipality, home owners can sometimes choose to pay their tax bills monthly, quarterly, twice a year or even for the whole year. If the seller prepaid their property taxes for the entire year, you’ll need to reimburse them a portion of that amount. This is calculated from the date you take possession to the date the seller paid up to. The same concept applies to condo fees.
Both prepaid property taxes and condo fees are paid in cash at the time of closing.
Legal fees, another hefty closing cost
Your lawyer and his or her team of legal assistants cost a fair amount of money. They are an unavoidable expense in closing a condo but should be considered a standard cost. After all, a good law team can save you thousands of dollars down the road. Expect to pay between $1,000 and $2,500 in legal fees depending on the circumstances of a property and the city you’re in. Legal fees are due at the time you take the keys at the lawyer’s office.
The overlooked title insurance
Title Insurance protects the home owner against losses due to title defects. Title defects are problems that prevent free and clear ownership of a property. They include situations like:
– Right of way;
– Neighboring encroachments;
– Unpaid liens against a condo;
– Fraud and forgery, and;
– Zoning non-compliance.
Sometimes, it’s not obvious that there may be title defects. This is especially true in cases when the property was used for fraud. Thankfully, title insurance covers the new owner for existing title defects.
Before you choose to buy title insurance, discuss it with your real estate agent and lawyer. Some real estate transactions don’t require it. However, in most cases it’s advisable to go with it. Title defects are rare but when they do come up are expensive to fix.
Title insurance is most often purchased when you buy a property or refinance it. It is arranged by your lawyer or notary at the time of purchase. Like the other closing costs, it’s due at that time and paid in cash. Title insurance costs depends on a set of factors but usually cost somewhere between $150 to $350.
Yet another closing fee: the home inspector
When buying a resale condo, always hire a home. Home inspectors can uncover construction flaws which can save you thousands in renovations. Don’t make the mistake of not hiring one because you’re buying a condo. Any construction can have defects.
Home inspectors, like every other real estate professional, charge for their services. A reputable home inspector will go from $200 to $400 depending on the size of the property and the city. This expense can’t be rolled into the mortgage and is paid at the time of the inspection.
Once the lawyers and realtors did what they had to do, you finally get the keys to your place and you’re ready to move in. Great, time to spend some more! Between getting the keys and moving in are a series of small expenses that can add up quickly. Here’s a list of the most commonly overlooked ones:
- $100/day to rent a van (ie UHaul)
- $50 for pizza and beer to pay your friends for helping you move
- Or, $700-$1000 for professional movers
- $50 for a professional locksmith to change your locks
- $50 in cleaning supplies
- $20 for extra key fobs (if applicable)
- $20 for elevator rental (if applicable)
In the grand scheme, these are small expenses but they add up quickly. Some of these expenses may not apply to your purchase but it’s good to plan so there aren’t any surprises.
Utility and other hookup fees
If you’re a first-time home buyer, there’s a few more closing costs lurking around the corner that need to be paid.
Most utility and service companies charge their clients hookup or new account fees. While it varies by province, provider and service, new customers usually pay between $40 to $60. Consider the following services and you can see how hookup fees add up quickly:
- Internet and Telecommunications
- Hydro / Electricity
- Natural Gas
- Furnace and AC Protection Plans
- Hot Water Rental
Generally, these fees will be due on your first bill, so about 30 or 60 days after you move in.
By knowing what to expect in closing costs and fees, you should avoid the frustration of feeling like everyone is out to steal money from you. Closing a condo requires a large sum of cash ready to be spent at the time the fee shows up.