Buying a property involves a lot of different steps, people and costs.  The price of the property is one thing, but what else does it cost to buy a home these days?

The short answer is “A lot”.

Here’s the longer answer.

While the purchase price of the home is absolutely the biggest component affecting how much money you need, there are a number of other costs that go along with the transaction.  Let’s start with the biggest ones and work our way down.

We will be focusing on how the costs work, placing them in context and then going over your options.  There’s lots of places to find this information but not many that talk about what it means.

Down Payment

In almost all cases, purchasers of real estate arrange a mortgage for some percentage of the purchase price.  While we commonly reference the purchase price as the cost of the home, your single largest outlay of money is most likely the down payment you provide for the property.  The amount of your down payment dramatically impacts a few other costs and also plays an important role in the mortgage and interest rate you are approved for with the property.

Land Transfer Tax

Whenever property is bought or sold in Ontario, the government takes a piece of the action in the form of a land transfer tax.  It’s paid for by the buyer, NOT the seller.

The tax amount is based on a sliding scale, where the more the property sells for, the more tax is paid.

Here’s the way the calculation works.

  • 5% of the value of the property up to and including $55,000
  • 1% of the value which exceeds $55,000 up to and including $250,000
  • 5% of the value which exceeds $250,000 up to and including $400,000
  • 2% of the value between $400,000 and $2,000,000
  • 5% for amounts exceeding $2,000,000, where the land contains one or two single family residences

You can find a quick and easy land transfer tax calculator here, on the Toronto Real Estate Board site.

Given the majority of purchases fall between the $400,000 to $2M mark, some simple math on comparing properties can be helpful.  Basically, it’s an extra $100 for every $5,000 more in purchase price.  Thinking about a place that costs $750,000 and comparing against one that cost’s $800K?  That extra $50K in purchase price will cost you another $1,000 in land transfer tax.

Since 2008, if you are buying in the city of Toronto, you get to pay an additional land transfer tax.  That’s right, two for one!

The City of Toronto land transfer tax is identical to the provincial land transfer tax, so if you’re looking to live in the city, you’ll need to budget twice what it will cost you in land transfer tax outside of Toronto.  The same example above is doubled as well, with every $5,000 in purchase cost resulting in an extra $200 tax amount.  So, for that $750K home versus the $800K home, if it was in Toronto, it would cost you $2K more in land transfer tax if you chose the $800K home.

The latest statistics on land transfer tax revenue in Toronto place it at about $818 million for the 2018 budget, which means it is about 6% of the city’s operating budget.  Definitely an important source of revenue for the city!

Understanding how land transfer taxes work means that you can negotiate with a fuller understanding of the financial implications of different options.  That 2% (or 4% in Toronto) land transfer tax means that negotiating a price adjustment of $5K after a home inspection reveals problems actually saves you not only that $5,000, but an additional $200 in Toronto, or $100 outside of Toronto.  It’s not a lot, but it can be helpful.

CMHC (Canada Mortgage and Housing Corporation) Fees

The second biggest cost after land transfer tax that you pay as a buyer are the fees from CMHC.  These fees are for insurance on your mortgage.  The insurance protects your lender (i.e. the bank, credit union or other lender), not you.  One of the reasons we have such low mortgage rates in Canada is because mortgages are insured, allowing lenders greater comfort with risk.

You likely think of CMHC fees as only being applicable if you have a down payment of less than 20% of the purchase price.  This is because it is only at this over 80% loan to value ratio that lenders actually pass the cost on to you as the borrower.

In fact, mortgage insurance premiums apply on all mortgages regardless of how much of a down payment you are making as the buyer.  If it is at least 20% though, the lender has simply built that insurance cost into the interest rate they charge to loan the money.

Here’s a chart that shows how the CMHC premium is calculated.

Loan–to-Value 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%

If you’re curious about a specific situation, there is a great calculator on the CHMC site.

To be clear, the premium percentage above is based on the loan-to-value ratio (mortgage loan amount divided by the purchase price). The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.  If you add it to your mortgage, there will of course be interest charged on that amount over the term of your mortgage, making it even more costly.

Regardless of when it is paid, it is important to note that with these premiums, it is charged up front and isn’t based on the term or amortization period.  For example, if you buy an $800,000 home with 10% down, you are charged a 3.1% premium on your $720,000 mortgage.  That’s $22,320 you need to pay in CHMC fees.  If you sell your home in three years or thirty years, you still paid that $22,320 up front.

It’s very important when you’re working with a mortgage broker to have a conversation about what impact your down payment has on these CMHC fees.  In the example above, if the buyer only had a $79,000 down payment, they would be less than 10% down.  That $1,000 lower down payment pushes them to the 4% rate, which means rather than paying $22,320, they would pay $28,840 in fees.  That’s over $6,500 in additional fees because the buyer didn’t have that extra $1,000.

It becomes quite clear that with a percentage fee based on your mortgage amount that is charged up front, avoiding CMHC fees is very useful.  When you combine land transfer taxes and mortgage insurance fees, it requires some significant market appreciation to “recover” these transaction costs from buying the property.

Professional Fees

Finally, let’s talk about the professionals involved in the transaction that need to be paid for their work.  These costs are far less significant than the land transfer taxes or mortgage insurance fees can be, but still need to be paid.

  • Lawyer fees typically total between $1,500 to $2,000, including disbursements, taxes and title insurance.
  • Lender fees range tremendously depending on the situation. If you are using a lender focused on high risk loans, it is likely you will have significant fees (1% to 3%) on top of the mortgage interest rate they offer.  In more typical situations, expect to pay a small bank fee ($500 is a good estimate) for registering mortgages or having an appraisal done.
  • Realtor fees are paid for by the seller in almost all circumstances so unless it is a very unusual situation, you should not have to budget any funds for your real estate agent’s commission.

While the purchase price of a property remains the highest number in any transaction, the above costs must be taken into consideration when budgeting for your purchase.  Home ownership is very rewarding but the transaction costs are considerable!