With the real estate market being so aggressive right now, I thought it would be valuable to do a ‘buying bootcamp’ video series.
Whether you’re buying for the first time, haven’t bought in a while (maybe the market was more balanced) or are downsizing, I’d like to share my tips and tricks on buying a home in Toronto.
Whether you’re looking to buy a freehold property or a condominium, many of the basic steps are the same. (If you’re looking for a condo, you can also check out my 3 part YouTube series on buying a condo)
To paraphrase Julie Andrews from The Sound of Music (yes, I know I’m dating myself here) let’s start at the very beginning, which is a very good place to start.
When you’re buying anything, especially a large purchase, you need to budget for the purchase. The same holds true for buying likely your largest purchase, real estate.
When you’re purchasing a property, you will need three things:
- a down payment
- a mortgage
- closing costs
You’ll need to provide your own money for the down payment and closing costs, and a mortgage lender sets up a mortgage for you.
How much Down Payment do you need when you buy a Toronto home?
Lets talk about the down payment first. The down payment is paid in 2 parts. The first part is paid as a deposit to secure the property. The balance of the deposit is paid on the day of closing.
So how much deposit is required?
For a Toronto property that’s $500,000 or less the minimum down payment is 5%
For properties between $500,000 - $999,999 the minimum down payment is $5% of the first $500,000 and 10% of the difference between $500,000 and the purchase price.
Anything over one million dollars requires a 20% down payment.
Usually, the deposit required is 5% which is delivered either the day of purchase or within 24 hours of the purchase.
Important dates to know about Deposits and Down Payments
- If your pulling money from investments, or getting a gift of funds, there are rules of how long the money needs to be in your account before you can use it for the down payment
- If you are drawing money from investments, like RRSP’s or if you bank at an on-line bank, accessing these funds quickly is sometimes a challenge, so you need to make sure the money is available when you need it
- If you are downsizing and all of the equity tied up is in your current home you will need time to arrange a line of credit or equity loan for the deposit and/or down payment
What is a Mortgage and how do you qualify?
So now we’ve discussed the down payment, you will need to arrange a mortgage. There are (generally speaking) 3 types of lenders that arrange mortgages. The first is a bank, the second are mortgage brokers and the third are private lenders.
I usually leave the details to the lenders to explain because there are a ton of mortgage loans you can get – but here are some basics you should know.
- A bank mortgage professional works for the bank first and you second
- A mortgage broker is independent and works for you first.
You should not have to pay any fees to apply for a mortgage!
You can get competitive advice and meet with both to see who can provide you the best options.
In a competitive market, you’ll be asked to provide a pre-approval of your mortgage (they should guarantee your rates for a certain amount of time).
To get a pre-approval you will need to provide your mortgage professional with written proof of:
- Income
- Debts
- Credit score
- They will ask for more information if you are self employed
Other important things to know about getting a Mortgage:
- Mortgages are subject to a Stress Test – you must prove you qualify at a higher interest rate than the rate you’ll pay. Lenders want to know if rates go up, you can still pay your mortgage.
- If you are putting down less than 20% on a property your mortgage is called a ‘high ratio mortgage’. Since this is riskier for the lender, they carry mortgage insurance on these. That insurance is passed on to you, the consumer. So the difference between your down payment & 20% is insured and that portion has a slightly higher rate – don’t worry it’s blended all together so you don’t pay 2 mortgages!
- Finally, there is more to a mortgage than interest rates. The ability to pay off your mortgage faster, penalties for breaking the mortgage & lines of credit are also features offered by different lenders.
Closing costs like Land Transfer Tax:
Lastly, there are some closing costs to budget for.
The largest of these is Land Transfer Tax; which is a one time tax paid on closing. If you’re a first time buyer, you’ll get some credits toward this (max. of around $4,000).
If you’re buying in Ontario, but outside the city of Toronto, budget around 1.3% of the purchase price. If you’re buying a Toronto Property you’ll pay double as there is a Toronto surcharge. (The good news is your property tax rates are lower in Toronto than outside!)
So now you know some finance basics, you’re pre-approved; lined up your down payment and closing costs, you’re ready to view some properties!
Other helpful links:
Simon LeFave, The Mortgage Centre
Land Transfer Tax Calculator - Automatically applies first time buyer credits
More information on Down Payments
CMHC Mortgage Rate Calculator and information on Mortgage Insurance
