Sunny Patheja - Real Estate Brokerage in Canada GTA

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Last Updated on Jun 14 2019

What to Know About Closing Costs When Purchasing Pre-Construction Housing

When it comes to closing costs on pre-construction housing, there is a lot to consider. But here are some major things every purchaser should know about closing costs for pre-construction housing:

1. Closing costs are different for every pre-construction project.
There is no pre-set amount of closing costs for any housing. Your total final closing costs inherently depends on your purchase price & what is written in your agreement of purchase and sale with the builder. This is where you should have an experienced lawyer review your agreement of purchase and sale during the cooling off period.

2. Closing Costs are composed of several things. Here are some of the biggest and most common closing costs components to know about when buying new construction:

2a) LAND TRANSFER TAXES
Land Transfer taxes can often be your single biggest expense on closing. Whenever you purchase a house, condo or land you are subject to Land Transfer Tax which is due upon final closing. The Ontario land transfer tax (LTT), is a marginal tax and each portion of your home’s value is taxed at a unique rate. It is also important to note that if you purchase a home in Toronto, Toronto has both provincial and municipal land transfer taxes.

2b) DEVELOPMENT CHARGES

Your other major expense on closing are development charges or development/municipal levies as they are also called. This is where the biggest change has occurred and is still occurring with respect to closing costs in Toronto and the GTA. Development charges are fees charged to the developer of any new home or condo by the local municipality. Development charges are essentially funding for things like schools, parks, streets, etc.

https://www.youtube.com/watch?v=SMSLZBTZvRk&feature=youtu.be

As a buyer, you should always make sure that all development charges are capped at a maximum amount in your agreement of purchase and sale with the builder (your contract). If the developer you are buying from says they will not put a cap your development charges, be aware that you are opening yourself up to the great risk of fees being any amount on your closing day. This is because development charges are not charged/assessed by the city until final closing, nobody can predict what the city is going to charge in the future.

So when the city is constantly raising these fees, you open yourself up to potential risk as a buyer. But when your development charges are capped, this means that they cannot exceed the capped amount.

Development charges are composed of, but not limited to:

Education Levies. These are levies dedicated specifically for building new schools in the city.

Section 37 levies. These are levies are essentially cash payments (legal bribes) builders can sometimes make to the city in exchange for zoning approvals or extra density. I.e. I will pay you $5m if you let me build 30 storeys instead of 20. Cost is often passed onto buyers who pay their proportionate share.

Public Art Levies. Similar to section 37, the builder agrees to create public art displays in the development in exchange for zoning approvals. The cost of the public art is sometimes passed on to purchasers who pay their proportionate share.

Parks Levies. Similar to education levies, only the money is meant to build new park space in the city.

Other “Municipal Charges”. This is a new one we are starting to see as of 2018. A generic heading which could be anything. The city is broke and they are charging developers millions and these costs are past on to the purchasers.

Important note: Development charges are subject to HST. So if you are paying $10k in development charges really you have to pay $11,130

2c) LEGAL FEES
In Ontario when you buy real estate you must have a lawyer handle your closing “legal title transfer”. The amount of legal fees you can expect to pay varies depending on your lawyer. If you are buying pre-construction, make sure your lawyer is very experienced in handling pre-construction purchases as they are not the same as resale purchases.

2d) UTILITY HOOK UPs.
When you purchase a new condo, the utilities (Gas, Water & Hydro) have to be connected for the first time and you (the purchaser) have to pay for this. Sometimes you are charged one fee for all utilities that are hooked up, and sometimes you are charged a separate fee for each of them.

2e) TARION WARRANTY.
Every new construction house or condo, comes with Tarion Warranty, but again, you (the purchaser) have to pay for it. This is a mandatory cost. The cost of the warranty is based on a scale related to the sale price of homes and condominiums.

https://www.tarion.com/builders/building-homes-condominiums/warranty-enrolment-fees

2f) Miscellaneous fees and charges

Miscellaneous fees include law society fees, deposit cheque administration fees, mortgage discharge fees, status certificate fees.

3. Closing Costs are constantly increasing
With municipal debt only increasing, and the “cost of living” also going up, in general, closing costs are also consistently increasing. But another way to look at is is, what was considered ‘high’ for closing costs years ago, might be considered ‘low’ today. So make sure you are working with a salesperson and a lawyer who are experience in pre-construction and can advise you on what to expect. The silver lining is that these development charges are an inflationary pressure on prices which corresponds with higher real estate values. So investing real estate is a great hedge against inflation.

4. The HST part of your Closing
Most developer price lists will say “prices include HST”. And if you ask most developer’s sales reps they will tell you that the prices include HST. But “prices includes HST” really means, the price net of the HST rebate you (the purchaser) would obtain should you or an immediate family member move into the premises to occupy

If you or an immediate family member will not be an end user of the premises, then you will be required to disclose this fact to your lawyer at final closing or possibly earlier at interim occupancy and you will no longer qualify for the built-into-the-price HST rebates.

So, should you not be an end user, HST is something you need to budget for on final closing but it’s not really a “cost” as in most cases you get all or nearly all of this money back after appropriately filing and applying for said rebate.