Hi, I am Lucia Gugliuzzi
Comprehensive Guide to Buying Your First Home in Ontario
Buying a home cannot be compared to how people walk into a mall or a department store when making a purchase. Home buying is a more intricate process than presenting yourself with the money or credit card and walking away having made the purchase.
Deep thought should be given to the idea of buying a new home. Perhaps the initial step will be to start saving up for a down payment. For first time homebuyers, the more you can save the better it is, and it goes a long way in making things easier in future.
However, saving for a future goal such as making a down payment for the new home is easier said than done. There are steps you can take as a potential homebuyer in order to save for a down payment. Having a budget will help to pay off debt such as credit card debt and free up money for the mortgage down payment.
Having a budget is the foundation to have control over your finances. A budget serves as a simple tool of accounting income and expenses. With a budget, you are able to direct your money towards future goals such as owning a home, not to mention “money management” and “stress relieve.”
A budget enables you to sort out your priorities, and in doing so, it helps finding the right balance between spending and saving. The budget is your solution in planning for a big bill, a mortgage, a big purchase, and for that holiday that you been wanting for a long time.
The preparation of a budget starts with choosing a time period, usually one month. I usually recommend all my clients to pick a typical month and account for everything in the range of income and expenses. I refer to income, all net income including tips or cash income. Some people find it easier to choose a bi-weekly period. They look at what money is coming in and what money goes out in the form of regular payments such as rent, car expenses, utilities, phone bills, shopping receipts, and credit card payments and other various expenses. I usually recommend that one takes “everything” into consideration. It is those little things such as groceries, coffees, miscellaneous, clothing, day care and children’s needs and all other that add up which we don’t typically account for.
Where your income is variable, an estimate can be made based on earnings from the previous year. Your money priorities can be determined based on the list of items required for basic living and fixed expenses that you could do without. Attention should be made to a lifestyle expense, such as going to a movie, eating out, take outs and so on. These expendable items are areas where you can save some money. Failure to budgeting has reached far consequences including running into massive debt and stress.
Budgeting and Finding a Mortgage
The general recommendation for homebuyers is to spend about 30% of your gross monthly income (before taxes) on rent or mortgages. Therefore, if you make $4,000 per month, then your rent should be $4,000 x 0.3 which equates to $1,200.
Before finding a new home, it is necessary that you find out how much you can set aside towards buying the property. Since most of us are most likely to get a mortgage, the best advice is to work with a reputable mortgage broker that will pre-qualify you. This way you know what your budget is and what you should spend given your particular scenario.
Mortgages are available from the bank and other lending institutions such as credit unions and trust companies. In other circumstances, some people may resort in getting alternative funds from private investors. Repayment periods for mortgages are determined by the size of the mortgage and what you can afford to repay per month. On average, mortgages are repaid over a period of 25 years to 30 years. Sometimes the mortgage can be repaid over a shorter or a loner period; this depends on the type of mortgage and down payment. Speak to your mortgage broker to get a better understanding of the options available.
Speak To a Mortgage Broker
In general, there are two major ways of getting a mortgage; either visit you bank directly or use your mortgage broker channels. It is to be understood that mortgage brokers are licensed professionals who have access to multiple lenders and are experienced and competent. They can be compared to insurance brokers who offer multiple insurance products from multiple insurers. Their uniqueness is that they have extensive training and experience in the mortgage industry. They personalize your situation to your particular scenario, and they compare to no other. An experienced mortgage broker professional has all the sides of the transaction covered and can place your mortgage with your bank. The difference is that you are also getting personal service.
Comparatively, banks offer mortgages to their customers with the cost of the mortgage being dependent on the specific bank’s lending rate. On the other hand, mortgages secured from the mortgage broker tends to cost less because brokers can purchase loans from the bank in bulk and can pass on the savings to the consumer. We care to put emphasis on the true meaning of service. Their dedication is aimed at you; the consumer and they have your best interest. This is not to be confused with the bank not caring for the borrower. However banks do not have the means to avail of all aspects of the transaction, “from start to furnish”.
Before setting your mind, take the earliest opportunity to speak to a mortgage broker or consultant. The professional mortgage broker will provide advice on a comprehensive range of products in the mortgages market, will make the process simple and easy and you can get educated along the way.
The mortgage broker will talk to you about your financial situation about the maximum that you can borrow and possible lenders ready to provide the mortgage. Essentially, the broker will advise on whether the identified mortgage is affordable through the use of a detailed budget planner. The detailed budget planner takes into account your income, debts that you have, and how you manage your finances.
You and I will work together in the process. You will need to disclose your financial scenario, starting with an interview to determine your credit rating, savings, debts and your desired goal to obtain a mortgage for your desired home. You are advised to exercise caution during this period so as to not negatively affect your credit rating. The mortgage broker will offer tips on how to ensure you remain with a good credit rating.
Your preferred mortgage broker will make the transaction smooth and easy so as to take you through the different types of mortgage and offer advice depending on the pros and cons of each type. Although the mortgage rate is an important factor, attention should be made to the flexibility features and not just the mortgage interest rate.
Fixed Rate Mortgages
The fixed rate mortgage, just as the name suggests, has a fixed rate for the term of the mortgage with a fixed payment made each month or as scheduled. This could also be a weekly or bi-weekly scheduled payment. The advantage of this mortgage is that you will not have to worry about hikes in the interest rates during the term. However, it will also imply that your monthly repayments will remain the same throughout the fixed period even when the interest rates decrease.
Typically, you have a choice to fix the mortgage for two, three, five years or more, depending on the lender and your desire.
You must make a deliberate decision on how long you want to commit to your mortgage term (this is the time you chose to lock in the rate). The majority of lenders will charge a penalty referred to as an early repayment or pre-payment charge. This is when you manage to repay the mortgage before the end of the fixed or even variable rate term.
The interest rates on this type of mortgage tend to be higher compared to the variable rate mortgages. Mortgage rates are set high due to the security of knowing that the repayments will not change over a fixed period.
Variable Rate Mortgages
This major category of variable rate mortgages are discounted rates and standard variable rate mortgages.
- The Standard Variable Rate Mortgages tend to have a lower rate compared to the other types of fixed-rate mortgages. Each lender has different discounts. With the variable rate option, you may be able to pay off your mortgage faster and if you use the payments in the correct way you can save time and money. Talk to your mortgage broker on how you can save money and how you can decrease the amortization.
- Variable Rate Mortgages are often associated with a rate such as the Bank of Canada base rate and match their changes to the base rate. It implies that if the Bank of Canada base rate changes, your mortgage rate will also change by a similar percentage. This has its pro’s and con’s.
There are other variable rate mortgages that are not discounted. This can happen in cases where there are challenges with a particular scenario. If you feel you could have challenges with your mortgage file, you may contact your mortgage broker and see there is a plan that can help you.
- Discount Mortgages are linked to the lender’s discounted rates. Take note that a specific lender will set their standard variable rate and can change it even with no changes to the Bank of Canada base rate. Every lender has their own rules.
In general, variable rate mortgages provide the lowest initial interest rates for homebuyers. The downside is that the repayments are not fixed, and an allowance must be made in monthly budgets to accommodate fluctuating payments.
Speak to your mortgage broker on your best option since some lenders combine different types of mortgages. The combination of a fixed rate and a variable rate may work well for homebuyers. Alternatively, some lenders offer a guarantee that variable rate loan will not exceed a set ceiling rate.
Mortgage Down Payment
The financing for a new home is composed of the down payment from the homebuyer and the mortgage from the lender. The mortgage down payment is the amount of money that you put aside from your own resources such as savings and investments and put in towards the purchase of a new home.
The first time homebuyer can utilize a number of ways to allocate funds for their down payment. The most traditional sources of funds include saving an amount from your paychecks, sale of stocks, bonds, or personal property, and assistance from immediate family members such as mother, father, sister or brother. Any other member is not considered immediate family member.
First-time homebuyers have the option of RRSP Home Buyers’ Plan (HBP) which confers the advantage of the withdrawing up to $25,000 tax-free from Registered Retirement Savings Plans (RRSPs) for a home purchase. Your mortgage broker can advise you to set up RRSP accounts in advance so that they can reap the reward when the time comes to purchase the new home. This can be very helpful at the time of filing your income tax returns because the income is sheltered. There are some obligations on your part, however, please consult with your mortgage broker to get more important details.
Evidence will be required to indicate the source of money to be put down as a mortgage down payment. Bank statements will be required in instances where savings or investments are used to place the down payment. Letter confirming monetary gift will suffice where immediate family assistance is availed towards making a mortgage down payment.
Other non-traditional sources of funds for a down payment are borrowed funds and gifts from non-immediate family members. First-time homebuyers who make use of the non-traditional for the mortgage down payment will incur a (default) insurance surcharge of down payments of 5% and below. Attention must be given to this because although this surcharge is added to your maximum mortgage amount, interest will also be charged on this money. This will also delay and decrease the equity built up in your home. I find that a lot of the times home buyers do not pay attention to this and find themselves surprised when the equity has been partly eaten up. On the positive side of the coin, however, this will be beneficial because you get into home ownership sooner. This is also a good reason to find a strategy where we can discuss and possibly increase your scheduled payments to speed up your equity growth.
Do the first time homebuyers need a down payment in Ontario?
First-time homebuyers are required to have a down payment when purchasing a home. The down payment is calculated as a percentage of the purchase price.
The value of a down payment can range from 5% to as high as 20% or more, of the price of the home in general. We, mortgage brokers will come in handy when making a comparison between lenders, products and flexibility and discuss the amount of down payment to be paid before a mortgage is advanced. There are other programs where the government will assist with the down payment of a home. Not all areas or buyers will qualify. We can have a chat about this and explore the option as well.
What is the minimum down payment on a house in Ontario?
New mortgage rules implemented in the past couple of years have decreased the mortgage affordability. You, the home buyers, are required to have more down payment than previously. The reason for this is because you need to use a higher interest rate calculation to determine the qualified amount. This is called “The Stress Test”. The minimum down payment payable in Ontario is dependent on the purchase price of the identified home and the type of income provided. The following are general guidelines and can change accordingly. The provisions for the minimum down payment as per applicable regulations are as follows:
- If the purchase price of the home is less than $500,000, the minimum down payment required is 5%.
- If the purchase price of the home is between $500,000 and $999,999, the minimum down payment required is 5% of the first $500,000 and a subsequent 10% of any amount over $500,000.
- If the purchase price of the home is $1,000,000 or more, the minimum down payment required is 20%.
According to a research conducted by reputable banks in Canada, they have determined that most home buyers plan to save 20% for their down payment in order to avoid the surplus cost of the default insurance. There are a few mortgage default insurance corporations in Canada. Some of the default insurance have slightly different guidelines and perks. Mortgage default insurance is necessary to protect the lender in the event that the home buyer or borrower defaults on the mortgage. The CMHC insurance is required on all mortgages with down payments that are less than 20% otherwise known as high-ratio mortgages. The conventional mortgages are those with a down payment of 20% or greater.
Note however that as mortgage lending rules have changed, the rates that mortgage rates apply are also changed. Therefore, it’s not any more “what is the rate,” the new wave is “it depends.” One scenario are different than the other. This is why it is important to speak to a mortgage professional that will invest the time to give you a real pre-approval.
How much do first-time homebuyers have to put down in Ontario?
Discuss with your mortgage broker on how much down payment you should put down as first-time homebuyer. Consideration will be made in your financial situation and your ability to make monthly mortgage repayments.
It should be noted that the amount that you put down as a down payment at the beginning of your mortgage determines three critical points over the life of the mortgage:
- The home price you can afford
- The size of your mortgage and monthly payment
- The amount of default insurance you pay
If you have a down payment of $25,000 or less, your maximum home price would be $500,000.
If the down payment to be made is $25,001 or more, the calculation becomes slightly more complex.
Banks have a chart where they calculate the premium percentage. You can arrive at your maximum purchase price using the following formula:
down payment amount minus $25,000) divide by 10% and then add $500,000.
For example, if you have set aside $40,000 for the down payment of your new home, the maximum home price you could afford will be $40,000 – $25,000 = $15,000 divided by 10% = $150,000 then add $500,000 to arrive at $650,000 as the maximum house price you can afford.
Usually, affordability is also a derivative of your income and debt level. Your mortgage broker will take you through the analysis of your financial status in regard to getting a mortgage for a new home.
- The Down Payment Determines the Size of Mortgage and Monthly Payments
The mortgage down payment set aside has great influence on the size of the mortgage as well as the interest and monthly payments across the period of your mortgage. The larger the down payment made towards the new home, the smaller the size of your mortgage. A reduction in size of your mortgage corresponds to reduced interest paid over the life of your mortgage.
- The Down Payment Influences the Amount of default Insurance you pay
The insurance premiums payable when purchasing a new home is calculated as a percentage of the total mortgage amount and not the purchase price. The insurance premiums will be significantly smaller with an increase in the down payment.
Speak to your mortgage broker to learn more about default mortgage insurance and how it is calculated.
Additional closing costs
When buying a home, you must pay attention to closing costs, such as legal, appraisal inspection and land transfer taxes. These can be costly, and some buyers have not been advised or educated in the needed amount. I have seen that surprises can come up especially on brand new purchases. It is worth to consult with a solicitor and the mortgage broker that will guide you through the process. This will avoid surprises, delay in closing not to mention stress.
Getting Pre-Approved and Mortgage Approval
The Financial Consumer Agency of Canada reports that lenders will look at factors such as your income before taxes, your expenses, your debts, your credit score, and report. I usually help my clients with obtaining a credit report first on their own as they can avoid a credit inquiry in case credit improvement needs to occur before presenting the application to the lender. We can then determine the mortgage amount and the amortization period to determine how much mortgage you can afford for the type of home.
It is therefore straightforward that to get approval; lenders will be looking at the proof that we provide so you can afford a mortgage. For the pre-approval, I will speak to the lender even before you need a mortgage. The mortgage broker comes in handy at this point and will even help you know what documents are required. Some of the necessary documents are:
- Evidence of your income
- Bank statements
- Latest credit card statements
- Proof of ID
- Proof of address
Even though the list of documents may vary between lenders, the receipt of these documents will set in motion the process for evaluating your mortgage affordability.
Getting the pre-approval is a preliminary step that allows us to know how much you qualify for and the best rates available. The pre-approval will offer you a strategic advantage in the competitive real estate markets. It saves time since you can make offers without attaching or minimizing the financing condition period. Additionally, the pre-approval will lock you for an interest rate for several months. Since the pre-approval is not binding, you will get a better rate when interest rates fall. Let your broker negotiate that for you.
Since mortgages differ depending on the lending institution, it is important to discuss with your mortgage broker about the best available options. Remember that you may qualify for a higher amount, but the broker may help you see what kind of impact the chosen mortgage will have on your lifestyle and payment. First time homebuyers should be wary of buying online since it might not be the right mortgage for you even if it is cheaper. I call it “it’s not one size fits all”. When it is too good to be true, it most likely is. This is a mortgage and the most comprehensive and serious purchase in one’s life; this is why I spend the necessary time to help my clients before, during and after the transaction.
After settling the mortgage that best suits you, you are free to move into the new home that you will make yours and be existed that you are now a “Home Owner.” Once you have moved in, you will have essentially entered into a contract with the lender who now expects you to pay back the total mortgage amount in monthly installments. It is your responsibility to honor the monthly payments, or otherwise, you may run the risk of losing your home. This is why a complete plan with a proper budget analysis is the most important. My clients rave about the guidance and help I provide because they have the peace of mind they need and mostly they know they are not alone.
In conclusion, the cost of buying a home for many people is the largest personal expense they will carry in their lifetime. That must not imply that the home buying process becomes an absolute nightmare. Diligence on the part of homebuyer coupled with professional advice will ensure that owning a home becomes the best and enjoyable decision ever taken.
This is why contacting me will be beneficial because I take you through to the core so you will not have surprises. Let’s look at your lifestyle and fixed expenses so you can be in control.
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