Don't Let Closing Costs Catch You Off Guard

Rachel in Home Buying, Money, Legal

Home buyers, especially first time home buyers, are often surprised by their closing costs.  Although the standard legal fees and land transfer taxes have typically been accounted for, there are the additional ‘little’ expenses that very often throw people,  even people who have bought and sold multiple properties, off course.

In the Realosophy HomeBuyers Guide, we recommend budgeting 2% to 3% of the purchase price for your closing costs. At the time of writing, the Realosophy HomeBuyers Guide did not have to take into account the new Toronto Land Transfer Tax, so if you are purchasing in the Toronto area, you will need to account for this additional amount.

You will need to budget additional amounts because ancillary expenses can arise, and without a proper cushion, you could find yourself begging the bank or the bank of mom & dad for a loan.
Many costs will technically arise after closing, but it makes sense to be prepared nonetheless.

As an example, if you are a first time buyer with no history with the gas, electric or water companies, they may require a deposit. At $500 each, that is an extra $1500 that you may not have accounted for. Continuing with utilities, you may receive your first bill and not know what hit you. Often, bills are estimates and can comprise 2 or 3 months worth of estimated charges. If you receive a bill for each utility right after you close, you are looking at another possible $1500. Don’t panic, just be forewarned!

On top of that, there are property taxes. Depending on when the property taxes for the property are required, your first installment may be due soon after you close – budget for that as well.
If you are buying a house in Toronto, don’t get caught off guard and assume the purchase price of the house is the actual cost of buying your home.  For a home priced at $300,000 you will be paying $5,700* in land transfer taxes alone.  If you only budgeted 2%, which is $6,000, you will only be left with $300 to cover legal costs, title insurance or a new survey (one of these will typically be required by your bank), a home inspection (if requested), insurance premiums, additional items on your statement of adjustments, moving costs, utilities that come due and property taxes. 

If you are buying a house (not a condo) you will want to consider lawn care supplies, patio sets, and outdoor lighting.  You will also need a shovel.  If you have been doing mental math, you are probably realizing just how quickly the numbers can add up. 
If the house is not in 'turn key' condition, you will also have to account for some renovations or upgrades.  Expenses for renovating are going to be well over and above even the 5% you may have allocated for your closing and may be significant, depending on your needs.

Be prepared - look for houses priced to fit your budget and make sure your budget accounts for all the 'little' things. 

*This does not account for the rebates available to qualifying first time home buyers.

Rachel Loizos is an associate lawyer at Sotos LLP in Toronto. She practices in the area of real estate law.
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