A First-Time Homebuyer’s Guide to Mortgages in Toronto
Buying a home in Toronto – especially as a first-time homebuyer – is no easy feat. It’s a big process, and there is a lot to consider before you jump into the market. Read this handy primer on mortgages for first-time homebuyers, and you’ll have the keys to your new home in no time.
Going Through Your Mortgage Pre-Approval Process
Most first-time homebuyers think obtaining the services of a realtor is the first step in the home buying journey; that’s incorrect. The very first thing you should do is get pre-approved for a mortgage. Getting pre-approved will tell you how large your purchase price can be, which will give you a concrete idea of what type of homes you could buy.
Start by finding a mortgage broker to work with. Mortgage brokers can search for the best rates and products available from many lenders, versus just going to a bank and having access to one lender’s rates and products.
Your broker will start by doing two different calculations called the gross debt service ratio (GDS) and the total debt service ratio (TDS). These ratios help your lender determine what size of mortgage payment you can comfortably carry. Here’s how they work:
The GDS ratio adds up your estimated monthly property taxes, utilities and mortgage payment, and divides that number by your gross monthly income. If the ratio is under 32%, the broker determines that you can afford those payments. The TDS ratio takes the same monthly mortgage payment, property taxes and utilizes, and adds in any debt commitments you may have like a car payment or student loan payments; your broker then divides this new total by your gross monthly income. If the ratio is below 40%, your broker knows you’ll be able to afford your monthly mortgage payments on top of your other debt commitments.
In order to qualify for a mortgage, your broker will also look at your credit score. Most credit scores fall between 660 and 900, and the higher your score is the more creditworthy a lender will deem you.
Insuring Your Mortgage (When Your Down Payment is Less Than 20%)
In Canada, your down payment must be at least 5% of the purchase price of yourhome. This rule means that if you have a down payment of $10,000, the maximum price you can buy a home for is $200,000. You can use RateHub.ca’s mortgage calculator to play around with different down payment amounts to see how it will affect your overall purchase price.
If your down payment is less than 20% of the purchase price of the home, you’ll need to insure your mortgage, in the event that you default on your loan. The amount of your mortgage default insurance premium depends on the size of your down payment and the size of your mortgage, and will be added to your mortgage amount and paid off over the life of the loan.
Choosing a Fixed Or Variable Mortgage Rate, Term and Payment Frequency
Getting a mortgage isn’t as simple as having your broker tell you how much you qualify for and what Ontario mortgage rates you can get – there are more decisions for you to make.
The first decision is to choose between fixed and variable mortgage rates. A fixed interest rate stays the same for a set term, and is ideal for first-time homebuyers who don’t like risk of a potentially fluctuating mortgage payment. A variable interest rate, on the other hand, fluctuates with the lender’s Prime rate. One thing to remember is Prime rate doesn’t change often. However, if it went up by even 1.00%, that could drastically affect your mortgage payment amount.
Another thing you’ll have to decide when finalizing your mortgage is whether you’d like to make bi-weekly, accelerated bi-weekly, weekly, accelerated weekly or monthly payments.
Preparing to Pay Your Closing Costs
Finally, closing costs are the most often overlooked aspect of the home buying journey – especially by first-time homebuyers – but they can add up to anywhere from 1.50-4.00% of the purchase price of your home, and that’s on top of your down payment.
There are many different closing costs to consider, including real estate lawyer fees and home inspection fees, but the biggest one will be your land transfer tax (LTT).The LTT is a tax you pay to your province based on the purchase price of your home. In most provinces, you pay one provincial LTT. If you buy a home in Toronto, however, you’ll also have to pay an additional municipal LTT. Fortunately for first-time homebuyers, you may be eligible for a rebate on these taxes – which is good because they can add up to thousands of dollars. Before you pay up, ask your real estate lawyer if you qualify for this rebate.