Everybody knows entering the real estate market is an expensive affair. In this post, we will talk about what you need to know buying and owning a home in Ontario before you take your first step in real estate investing.
Buying A Home Begins With a Mindset
Preparation for buying a home starts long before you find a home of your dreams. There are lot of expenses that you need to consider when you plan your home purchase. Before you start investing, you need to get into a saving mindset.
Best way to become a successful real estate investor is to intelligently approach your big purchase. Do not rush to put your signature on the dotted line of the Agreement of Purchase and Sale before you have worked on your purchasing budget.
Here are some of the costs to consider when you start planning:
01. Home Inspection
Cost: between $300.00 and $1,000.00 for a residential property
Yes, in the grand scheme of things a home inspection does not seem like the biggest expense. However, the expenses add up so every penny counts.
A Home inspection allows the Buyer to uncover the hidden defects of the house. When the market is on the rise, the lack of supply drives real estate prices up. As a result, purchase price would often exceed the true value of real estate. In such a market, a comprehensive home inspection could be a determining factor before making an offer.
Let us put this in an example. A house is on sale for $500,000.00, a true market value of the property. Due to low supply and high demand, the property receives offers from multiple purchasers. To win the property, purchasers start a bidding war which drives the purchase price of the property up to $600,000.00, $100,000.00 higher than the true market value. One of the purchasers is considering offering a winning bid of additional $50,000.00, but before they sign a counteroffer, they conduct a home inspection. The inspection reveals serious structural issues, which would cost another $100,000.00 to repair [1]. Had the purchaser offered the additional $50,000.00, the purchase price would be $650,000.00 with another $100,000.00 in necessary home repairs.
In a case that our fictional purchaser ended up offering a winning bid of $650,000.00 and closed on the house. Post-closing, in a best-case scenario, the purchaser incidentally discovers the above-named structural damage and incurs additional $100,000.00 while fixing the issues. In a worst-case scenario, the purchaser or their family member gets injured due to the structural issues AND the Buyer still incurs the $100,000.00 in renovation costs.
According to Toronto Real Estate Board [link], between years 2011 and 2021, the average year-over-year increase in real estate prices was $57,304.55. It follows that in two years, the true market value of the property from our example would be $614,609.09. Our fictional purchaser would have spent $750,000.00 on the property [2].
This example demonstrates how an early home inspection could help to avoid unforeseen expenditures and injuries, and it helps the purchaser make an intelligent decision when it comes to investing in real estate.
02. Land Transfer Tax
Cost: See calculator here
In Ontario, land transfer tax is based on the consideration value of the property transfer. The formula for the calculation is a sliding scale. It is important to note that if you are buying a property in Toronto, municipal land transfer tax would apply as well. Ontario [link] and Toronto [link] land transfer tax sliding scale table can be found below:
| Consideration Value | Land Transfer Tax Percent |
| $0.00 to $55,000.00 | 0.50% |
| $55,000.01 to $250,000.00 | 1.00% |
| $250,000.01 to $400,000.00 | 1.50% |
| $400,000.01 to $2,000,000.00 | 2.00% |
| $2,000,000.01 and up | 2.50% |
Let’s calculate land transfer tax on a $500,000.00 home purchase.
| Consideration Value | Land Transfer Tax Percent |
| $0.00 to $55,000.00 | $55,000.00 * 0.50% = $275.00 |
| $55,000.01 to $250,000.00 | $195,000.00 * 1.00% = $1,950.00 |
| $250,000.01 to $400,000.00 | $150,000 * 1.50% = $2,250.00 |
| $400,000.01 to $2,000,000.00 | $100,000.00 * 2.00% = $2,000.00 |
| ONTARIO LAND TRANSFER TAX | $6,475.00 |
| TORONTO LAND TRANSFER TAX | $6,475.00 |
| TOTAL LAND TRANSFER TAX | $12,950.00 |
There are land transfer tax rebates available for First-Time Homebuyers (FTHBs) for both Provincial and Municipal land transfer tax.
| MAX. PROVINCIAL LTT REBATE [Link] | $4,000.00 |
| MAX. MUNICIPAL LTT REBATE [Link] | $4,475.00 |
To qualify for a rebate, the Buyer must satisfy certain criteria, an outline can be found below, and I will talk about tax rebates and other benefits available for first-time homebuyers in an upcoming post.
- Be at least 18 years old;
- Occupy the home as their principal residence within 9 months of the closing date;
- Have never held interest in a home anywhere in the world;
- The Buyer’s spouse has never held interest in a home anywhere in the world during the course of the marriage;
- In addition, in order to qualify for a rebate, the buyer must be a citizen or a permanent resident of Canada.
I have added a land transfer tax calculator to my website to make calculating LTT easier for my clients. Access the calculator here.
03. Legal Fees
You will need to employ the services of a real estate lawyer to close on your home purchase. Legal fees in real estate transactions are usually flat fees with additional disbursements that you will be responsible for.
Disbursements are expenses that your lawyer has incurred while working on your file.
Click here to review Davylaw Professional Corporation fees for different purchase transactions.
04. Title Insurance
Cost: from $325.00 [3] – see calculator here
Title Insurance is an important step in buying and owning real estate in Ontario. Insuring the title protects the owner of the property against many unknown title defects and off-title issues.
The policy is normally ordered by a lawyer acting for the purchaser. The one-time fee is paid on the closing date and grants the homeowner coverage as long as they maintain an interest in the property.
Title Insurance is not mandatory, but, as a real estate lawyer, I highly recommend purchasing it on closing date. However, if you decided not to buy the policy on closing, you can always purchase it at a later day.
05. Home/Fire Insurance
Cost: from $30.00 [4] – see calculator here
While title insurance protects the homeowner against unseen defects of the property, home or fire insurance protects the homeowner against physical damage to the home.
Home insurance is also not mandatory, unless you are taking out a mortgage to close on your home. If that is the case, your lender will require a valid home insurance policy to be purchased before closing.
06. Mortgage Default Insurance
Not all mortgages are made the same. Canadian banks together with the Federal Government have developed programs which allow home buyers enter the real estate market without having the 20% down payment required for a conventional mortgage.
These types of mortgages are called Insured, as they are insured by the government (through CMHC, a crown corporation) from default by the borrower. For a purchase to qualify for an insured mortgage, the minimum down payment must be 5% of the first $500,000.00 plus 10% of the balance of the purchase price up to $999,999.99. Mortgage default insurance is not available for home purchases over $1,000,000.00 [link]. In addition, the borrower would have to go through the normal bank mortgage approval process.
For example, if you are purchasing a property for $600,000.00, your minimum down payment will be 5% of the first $500,000.00 ($25,000.00) plus 10% of the balance which in this case is $100,000.00 ($10,000.00). This means that the minimum down payment for a $600,000.00 purchase is $35,000.00 ($25,000.00 + $10,000.00). However, if the purchase price is $1,000,000.00, you must put at least 20% down to get approved for a mortgage. Calculation of the above example can be found below:
| Purchase Price used for calculation | Minimum Down Payment percent |
| First $500,000.00 | 5% * $500,000.00 = $25,000.00 |
| Balance of $100,000.00 | 10% * $100,000.00 = $10,000.00 |
| TOTAL MINIMUM DOWN PAYMENT | $25,000.00 + $10,000.00 = $35,000.00 |
Mortgage default insurance is calculated based on the percent of the loan to the value of the mortgage applied and is subject to a PST of 8% in Ontario. The mortgage default insurance percentage table can be found below:
| Loan-to-Value | Mortgage Default Insurance Premium |
| Up to and including 65% | 0.60% |
| Up to and including 75% | 1.70% |
| Up to and including 80% | 2.40% |
| Up to and including 85% | 2.80% |
| Up to and including 90% | 3.10% |
| Up to and including 95% | 4.00% |
Payment of the insurance premium is the responsibility of the borrower. Normally, the insurance amount is added to the total mortgage amount which is then amortized over 25 years (25 years is the maximum amortization period for insured mortgages). This means that you are slowly repaying the bank the insurance that they purchased on your behalf. In case you break your mortgage before the end of the term by selling your property, you will have to repay or port the unpaid premium to your new home, if you sold to buy a new primary residence.
In my experience as a real estate lawyer, I found that many borrowers are unaware that the total mortgage amount on the first page of their mortgage commitment does not reflect the actual amount that their lawyer will receive on closing. This creates last minute stress for the purchaser as they must come up with additional funds before the closing date. Below you will find a breakdown of cost of an insured mortgage.
| Purchase Price | $600,000.00 |
| Down Payment | $35,000.00 |
| Mortgage Amount | $565,000.00 |
| Mortgage Default Insurance | $22,600.00 |
| PST on Mortgage Default Insurance | $1,808.00 |
| Total Mortgage Amount | $587,600.00 |
| Total Amount Advanced to Lawyer | $563,192.00 [5] |
My Roof is Leaking
It is finally the closing date. You got the keys to the property and the moving trucks are on their way to your new home. It seems like a perfect day, however, beware that sometimes things may go wrong right after closing.
What happens when you move into your new home, and you notice that there is a hole in the wall or that none of your kitchen appliances are working? Who is responsible for repairs of broken or damaged fixtures or chattels?
This situation could be avoided by being pro-active. When entering into an Agreement of Purchase and Sale, make sure to include an inspection clause which would specify the number of times you could visit the property before closing. The clause could also specify the length of the visits. Some of those times could be used to measure dimensions of the rooms to make sure your furniture fits or for your appraiser to come in to determine the accurate property value. However, I highly recommend saving one visit for the day before closing (or a few days, depending on when the closing day falls on) for a walk-through inspection of the property.
Before the visit, review your Agreement of Purchase and Sale and make a list of all the items that you would need to check. That could be a list of chattels included in the purchase or a list of issues that the Seller was supposed to fix before closing.
Once your list is ready, reach out to the Seller (through their lawyer or realtor) to schedule a visit to the property. During this visit, complete a walk-through inspection with your list making sure that all the chattels were left at the property, and all the issues were fixed. With regards to the appliances (such as a dishwasher or a washing machine), I would advise you to run them for a full cycle to ensure that everything is working properly. In order to have enough time to run the appliances, schedule your visit for an early morning and make sure that your inspection clause allows you to stay at the property for long enough to run at least one full cycle for all appliances. Should you discover any issues with the property, document them thoroughly and send the evidence to your lawyer and realtor. Your lawyer will speak to the seller’s lawyer requesting for the issues to be fixed on or before closing.
However, there are circumstances when buyers omit including many conditions in the offer to win a bidding war or to get a quick closing deal from the Seller. This happens especially often when the market is hot. What do you do then? Your first instinct should always be your Agreement of Purchase and Sale. What many Buyers forget is that purchasing a home is a transaction governed by a contract. Therefore, if you are having any issues during the course of your transaction, you should review your agreement to look for answers and possible solutions.
Check if your agreement provides for a clause advising that you are purchasing the property in “as is” condition. If it does, there is not much you can do about the condition of the property or the chattels. If the Seller denies excluding the “as is” clause from the contract, request a property inspection before signing anything. If you entered into such an Agreement and did not conduct a property inspection, you may face unforeseen expenses after the closing date.
If your Agreement provides that all chattels are to be “in good working order” on the closing date, rely on this clause to enforce the repair of the chattels. This would include any out of order appliances.
If you discovered any damage to or outstanding work at the property which contradicts the Seller’s obligations in the agreement (for example, the Seller was supposed to repaint all the walls white and they failed to do so), rely on those clauses to enforce specific performance.
Every agreement is unique; to avoid getting hit with unexpected expenses after closing, have a real estate lawyer review your Agreement of Purchase and Sale, before signing it.
Sources and Links
[1] The numbers used in the example are fictional and were used for explanation purposes alone and do not constitute representation of real estate or home repair prices.
[2] Real Estate market values fluctuate and although the average year-over-year increase is $57,304.55, the value of the same property during one year can be significantly higher at some points during the year allowing for higher returns in a case of a sale.
[3] Based on a quote for a freehold resale home with $500,000.00 purchase price.
[4] Based on a quote for a condo apartment built in 2019 with no mortgage security.
[5] It is important to note that some lenders have additional fees which would render the amount advanced to their lawyer even less.
