The hidden costs of buying and selling a house
The actual purchase price on a house listing is only part of the ultimate cost of buying or selling it. Whenever a house changes hands, there are a number of associated fees -- some of them amounting to thousands of dollars -- that affect the final price of the transaction, whether you are buying a new home or selling your old one.
We asked Toronto real estate lawyer Stanley Clapp to give us a rundown of what extra fees to expect, and how much you can expect to be out of pocket.
Land Transfer Tax
Many provinces (and most major cities) levy a land transfer tax (sometimes called a property purchase tax) that is calculated as a percentage of the purchase price. The formula varies from province to province and from city to city; for specifics, see the website relocate–canada.com for a list of land transfer tax rates for most Canadian provinces, consult the municipal/provincial government website for your region, or ask your lawyer or agent.
As an example, in Ontario, the Land Transfer Tax is calculated as follows:
- on the first $55,000: 0.5%
- from $50,000 to $250,000: 1%
- from $250,000 to $400,000: 1.5%
- over $400,000: 2%
First-time buyers receive an exemption of $2,000.
The City of Toronto's Land Transfer Tax is calculated on the following scale:
- on the first $55,000: 0.5%
- from $50,000 to $400,000: 1%
- over $400,000: 2%
First-time buyers receive an exemption of $3,725.
Adjustment costs are any prepaid costs paid by the vendor that are to be reimbursed when the buyer takes possession of the home. These can include property taxes; prepaid water, hydro or gas charges; lawn care service contracts, and so on.
With metered services such as hydro, gas or water, the meters are read on the day the house changes hands, to enable you (and the utility company) to verify how much the buyer and seller each owe or are owed.
The exception is heating oil; it is standard for the seller to top up the tank of heating oil at the time of the sale, and have the buyer pay for one full tank.
Most banks no longer charge a fee to set up a mortgage or do a mortgage-related appraisal, but it is worthwhile to verify this when you are shopping for your mortgage.
If you are borrowing more than 80% of the purchase price of the home, you will need to obtain mortgage insurance from the Canada Mortgage and Housing Corporation. The CMHC's scale is as follows:
- 80–85% of purchase price: 1.75% of mortgage, plus PST
- 85–90%: 2% plus PST
- 90–95%: 2.75% plus PST
- over 95%: 3.1% plus PST
If you are arranging your mortgage through a mortgage broker, you may be charged a finder's fee as well; usually, the lender pays this fee to the broker, but if you are considered a high-risk mortgagee, it may apply to you as well.
All mortgage companies require you to carry home insurance, and if you ever have a fire or major theft, you'll be thankful for it. The cost varies widely depending on your coverage and the company you insure with; just as with car insurance, it's worth shopping around to get the best price. Some companies offer discounts if you insure both your home and car with them.
There are a slew of miscellaneous but necessary legal documents that a house sale generates, which can only be processed by a lawyer. However, by law the maximum a lawyer can charge you for his services is 1% of the purchase price or $1,200, plus GST and disbursement costs (more about that in a moment). The lawyer will generate the following searches and documents for you:
- Title Search, which verifies that the vendor legally owns the property and can sell it;
- Searches with the utilities, tax departments and building department to verify that there are no liens on the property;
- Registering the title deed and mortgage;
- In the case of a rural property, septic tank and potable water searches.
On top of the lawyer's fee, there are also disbursement costs, which are the miscellaneous fees of doing the search, such as office faxes, phone calls and mail costs, and other costs of doing business.
Title insurance is not mandatory, but most lawyers highly recommend it these days to protect you against mortgage fraud, identity theft and forgery, a growing crime especially in large urban areas. As Clapp notes, many computerized municipal records are surprisingly vulnerable to fraudulent hackers. The cost on a $450,000 home is a few hundred dollars.
The costs associated with the sale of a home are not quite as complicated as for buyers, but they can be just as significant.
The big fee sellers are required to pay is the commission fee, for both your own and the buyer's realtors. Generally, the total cost is 5% (2.5% for each agent), but you can sometimes negotiate a lower rate. GST is added to this.
You also need a lawyer when you sell, to discharge the title and mortgage, verify that all prepaid expenses are returned and utilities and other services cleared, and to handle the actual transaction. Again, the maximum is $1,200 plus GST, but most lawyers charge less to process sales than purchases. Disbursements, as with purchases, are extra.
If you have a “closed” mortgage and sell your home before the mortgage matures, there may be penalties and discharge fees, which can amount to as much as three months worth of mortgage payments, plus a discharge fee of $200 to $300. If you transfer the mortgage to your new home, however, most lenders will waive this fee. Open mortgages usually carry higher interest rates but can be transferred or discharged without penalty.