Understanding Development Charges: What Every Home buyer Needs to Know

When you’re on the path to homeownership, one of the final and most significant financial hurdles you’ll face is paying your closing costs. These costs can amount to thousands, or even tens of thousands of dollars, depending on your specific situation. As a general rule of thumb, it’s advisable to set aside 5% to 10% of your purchase price for closing costs. For first-time homebuyers, this estimate is slightly lower, ranging between 4% and 8%. Although these percentages might seem high, they serve as a solid target to ensure you’re fully prepared for the financial obligations ahead.

Among the various closing costs, development charges stand out as one of the most substantial. It’s easy to overlook these charges amidst the excitement of purchasing a new home, but understanding them is crucial.

What Are Development Charges and What Do They Cover?

Development charges are fees imposed by local governments on newly constructed homes. These fees are designed to fund the infrastructure and services that will be needed by new residents once they move into their homes and neighborhoods. This includes essential services like roads, public transit, water and sewer systems, community centers, and police and fire facilities. In fact, according to the Building Industry and Land Development Association (BILD), government fees and taxes, including development charges, constitute approximately 22% to 24% of the total cost of a new home. Development charges, often amounting to tens of thousands of dollars per unit, represent the largest component of these fees.

How Are Development Charges Determined?

In Ontario, the process for determining development charges is governed by the province’s Development Charge Act. It begins with a background study that assesses the anticipated development within a municipality. This study estimates the additional demand that will be placed on infrastructure and services, such as water supply, roads, and schools, and projects the costs associated with these needs.

Following the study, municipalities have up to a year to enact a bylaw if they determine that an increase in development charges is necessary to cover the projected expenses. In recent years, such increases have become common, with charges rising significantly.

The Rapid Increase in Development Charges

Development charges have been increasing at a much faster rate than property taxes. For instance, in the Greater Toronto Area (GTA), there has been a sixfold increase in development charges since 2009. In Toronto, development charges for a two-plus bedroom unit (referred to as “apartments” even when part of a condominium development) were $36,165 in 2018. By November 2021, these charges had surged to over $55,000 for the same type of unit.

And the increases might not stop there. A 2022 consulting report recommended that Toronto raise development charges by an additional 49%. However, these potential increases would not impact developments already under construction.

Why Development Charges Are Necessary

While these fees can be a significant burden for homebuyers, there are valid reasons for their existence. Growing cities require new infrastructure to support their expanding populations. For example, Toronto is expected to welcome over a million new residents in the coming decades. Ensuring that these new communities have adequate services—such as roads, libraries, and water supply—requires substantial investment, which is partially funded through development charges.

What This Means for Homebuyers

When you purchase a home, particularly through programs like Options for Homes, known development charges are often factored into the purchase price, allowing these costs to be included in your mortgage. However, if development charges increase during the course of a project, the additional costs are typically passed on to the buyer at closing. This is why it’s crucial to be prepared for the possibility of development charges being included in your final closing costs.

Although these charges can contribute to the overall financial burden, they are a part of the 5% to 10% of the purchase price that we recommend you set aside for closing costs. By contributing to development charges, you are helping to ensure that your new community has the necessary services and infrastructure to thrive.

Join Homelife Paramount Realty Today

To stay informed and ahead in the real estate industry, and to gain the knowledge you need to navigate complexities like development charges, consider joining Homelife Paramount Realty. Our team is dedicated to keeping you informed and prepared for every step of your homeownership journey.