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Saturday, April 13, 2024

Closing Costs When Buying a Home: What First-Time Homebuyers Need to Know

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In the “Homeschooling” report, we will provide Canadians with essential insights into the housing market that may not be covered in traditional school education. Today, we’ll delve into the world of closing costs when buying a home and shed light on important details that first-time homebuyers often overlook.

Buying a home is a significant milestone, where saving for a down payment and securing a mortgage are crucial aspects of the process. However, another crucial aspect that is often overlooked is closing costs, the expenses incurred when taking possession of the home. While these fees and taxes may seem minor individually, they can add up to thousands of dollars, making it important for first-time buyers to understand and plan for them.

Here are insights from real estate legal experts in Canada to explore the essential factors that first-time homebuyers should consider when embarking on the journey to purchase their dream home.

Dharam Dhillon, a B.C.-based real estate lawyer, emphasizes the importance of early preparation. Initiating the paperwork and budgeting process with a lawyer at least two weeks before completing the transaction can reduce stress related to numerous unfamiliar fees and paperwork.

One of the most significant costs during the closing process is the land transfer tax, which varies by location. In provinces like Ontario and B.C., these taxes are calculated as a percentage of the purchase price.

For example, in Ontario, for the first $55,000 of the purchase price, a 0.5% tax rate applies, and any amount above that up to $250,000 is taxed at 1%, and so on.

According to the Canadian Real Estate Association, using Ratehub.ca’s land transfer tax calculator, a first-time homebuyer in Ottawa may have to pay $9,850 to purchase a $668,000 home, the average home price in Canada the previous month. However, a buyer of a similarly priced home in Toronto would pay double that amount.

There’s good news for first-time homebuyers, though: tax rebates can help offset some of these costs. For example, first-time homebuyers in Ontario and Toronto can save thousands of dollars in land transfer taxes.

First-time homebuyers in Ontario can receive a $4,000 provincial land transfer tax rebate, while Toronto residents can save up to $4,475. Similar programs are available in other provinces.

In addition to land transfer taxes, other “fixed costs” also contribute to closing fees. These include real estate lawyer fees, title searches to determine ownership rights, and title insurance. Furthermore, property tax adjustments and goods and services tax (GST) may apply based on the nature of the transaction.

To avoid surprises, buyers need to plan ahead. Dhillon recommends budgeting an additional $2,500 to $5,000 for closing-related expenses.

Couples receiving financial assistance from family members for the down payment should consider legal safeguards. Additionally, legal experts suggest drafting wills to clarify asset distribution in case a spouse passes away.

Expert Malhotra emphasizes that changing locks is an important step after receiving the keys. This simple but often overlooked action can prevent unpleasant surprises and ensure peace of mind in your new home. For those planning to buy a home, remember that while the excitement of homeownership is real, understanding closing costs and taking proactive measures can help you avoid unpleasant surprises and make the transition to your new home smoother.

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