Don’t Forget Closing Costs! By Leah Burry
When you purchase a new home, it is important to be aware of the additional (and often unexpected!) costs that will come up prior to your closing date. A closing date (also often referred to as a completion date) is the final step in purchasing your new home, and is the date that the ownership of property is transferred from the seller to the buyer. It is also the date the seller receives the balance of the purchase price owed to him or her.
Quite often, buyers attend at a law firm to sign documents in preparation for their upcoming closing date and have little to no idea about the additional costs over and above the purchase price that they are responsible for paying. This can quickly turn into a very stressful scenario for buyers who were unaware of those additional costs and so will probably not have planned or budgeted for them (and yet now they must be paid in order for the purchase to close). These “extra” costs may include things like Property Transfer Tax (“PTT”), insurance costs, mortgages application fees, legal fees and other customary adjustments for items such as property taxes and utilities made between buyer and seller.
The following is a discussion of some of the main “extra” costs that you should expect:
Property Transfer Tax – In B.C., Property Transfer Tax (“PTT”) is a form of sales tax on property which is paid by the buyer when the transfer of legal title to the property is registered in the Land Title Office (sellers do not have to worry about paying PTT). If you are a Canadian citizen or Permanent Resident, the PTT charged on the fair market value of the property is as follows:
• 1% on the first $200,000 of value/purchase price;
• 2% on the portion over $200,000 up to and including $2,000,000;
• 3% on the portion over $2,000,000; and
• if the property is residential, a further 2% on the portion over $3,000,000.
It will be noted that there are some limited exemptions to PTT available to certain buyers, so it is important to inquire about exemptions that may be available as the potential savings could be significant. A couple of main exceptions available on residential purchases are as follows:
If you are a first-time home buyer and have never owned an interest in a principal residence, you may be fully exempt from paying PTT if the purchase price of the property is less than $500,000.00 and the size of the property is 1.24 acres or smaller. In order to qualify for the exemption, you must be a Canadian citizen, and have lived in B.C. for twelve consecutive months prior to the date the property is registered.
The Newly Built Home Exemption reduces or eliminates the amount of PTT you pay when you purchase a newly built home. In order to qualify for the full exemption, the property you are purchasing must be a newly built home and must be only used as your principal residence. The home must have a fair market value of $750,000.00 or less, and the size of the property must be 1.24 acres or smaller. A newly built home includes a new house constructed and affixed on a parcel of vacant land and a new apartment in a newly built condominium building.
Property Tax Adjustments – Property taxes should not be confused with PTT. Property taxes are payable to the local municipality (or equivalent authority) to help fund services in your municipality. However while property taxes are generally payable by July 1 each year, they cover the entire calendar year. Therefore if your move in date is following July 1 you will have to reimburse the seller for a portion of the property taxes they paid from the closing date to the end of the year. The lawyers assisting with the transaction will do the calculations for the adjustment prior to closing, but depending on the time of year, it will mean a credit to either the buyer or the seller of the property.
Goods and Services Tax (“GST”) – Generally GST is only applicable on new construction, so if you are buying used residential housing you will not be responsible for the payment of GST. If you purchase a new home, GST is charged at 5% of the purchase price, subject to potential exceptions which may be available (for first-time home buyers, for example).
Home Insurance – If you’re getting a mortgage to assist you with the purchase of your home, you will be required to buy home insurance. Lenders require property buyers to show proof of home insurance before they will fund a mortgage, so be aware that while the cost is usually nominal, it can vary depending on your lender’s insurance requirements.
Title Insurance – Most lenders require title insurance as a condition of funding, so if you are obtaining a mortgage you should expect to pay for title insurance. Title insurance protects your lender (and you) from possible title defects related to the title of your new home.
Legal Fees – There is a lot of paperwork involved in purchasing a home. Your legal fees cover the costs associated with the preparation of land title forms and other documents that are necessary for transferring the title of property from the seller to the buyer and providing the necessary mortgage security to the buyer’s lender. Your lawyer will do a title search of your property, calculate closing costs and prepare the Statement of Adjustments to show you an itemized list of the costs associated with your deal. On the closing date, your lawyer will facilitate the financial side of the transaction, transfer title of the property to the buyer’s name, and ensure the purchase funds make their way to the seller.
Closing costs can add up, so ensuring that you have accurately calculated the amount of money you will be required after to complete your purchase in advance of your closing date will help make the process as seamless and stress-free as possible.