If you’re thinking about buying your first loft or condo in Toronto this year, you probably already know some of the basics first steps you'll have to take. For example, your down payment has to be at least 5% of the purchase price. You may also know there are some closing costs involved, including legal fees, because you need a real estate lawyer to facilitate the entire transaction. For a clearer picture here's a summary called Mortgage 101 for you the first time buyer in Toronto.
Qualifying for a Mortgage
For starters, in order to qualify for a mortgage, lenders will look at a few things: your credit score (which should be between 660 and 900), your down payment (which must be at least 5% of the purchase price) and your debt service ratios. There are two debt service ratios lenders use to determine how much you can afford to borrow for a home: the gross debt service ratio (GDS) and the total debt service ratio (TDS).
With the GDS ratio, your lender estimates and adds up your monthly mortgage payment, property taxes and utilities, and divides the total by your gross monthly income. The result needs to be less than 32% for the lender to feel confident you could afford to own a home. With the TDS ratio, your lender goes one step further and adds your other monthly debt payments to your housing costs, then divides it all by your gross monthly income. The result needs to be less than 40% for the lender to feel comfortable that you could afford to fulfill all of your debt commitments.
CMHC Insurance Premiums
You know that the minimum down payment in Canada is 5% of the purchase price, but do you know what happens if you put down anything less than 20%? You need to purchase mortgage default insurance. Otherwise known as CMHC insurance, mortgage default insurance protects your lender, in the event that you ever defaulted on your mortgage loan. The premium you pay is based on your down payment and is then added to your mortgage amount, to be paid off over the life of your mortgage. To see how your down payment could affect your CMHC insurance premium, play around with our CMHC insurance calculator.
Fixed vs. Variable Rates
Once you know how much you need to borrow for a mortgage, you’ll need to decide on a mortgage rate type and term. The decision to go with a fixed or variable mortgage rate is not always easy to make. With a fixed rate, you will pay one rate – and therefore one mortgage payment amount – for the entire mortgage term (i.e. 1 year, 3 years, 5 years, etc.). Essentially, you can “set it and forget it”, meaning you will never need to worry about how the market might affect your rate or payment amount.
With a variable rate, however, your interest rate – and therefore mortgage payment amount – are attached to your lender’s Prime rate. For example, your lender might offer you a rate of Prime – 0.45%. If their Prime rate ever went up, your interest rate would also go up, which would affect your monthly mortgage payment amount. Historically, variable rates have proven to save homeowners’ money, but the stability of a fixed rate and payment may ease the more risk-averse homeowners’ minds.
Once you decide on a mortgage rate type and term, you can then choose from 1 of 5 mortgage payment options: monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly.
Land Transfer Taxes (and Rebates)
Your land transfer tax isn’t technically part of your mortgage, but it’s a closing cost that is due before you can pick up the keys to your new home, so we like to make sure first-time homebuyers have enough money saved up for it. Land transfer tax is calculated as a percentage of the value of your property. Anyone who purchases a home in Ontario has to pay a provincial land transfer tax, but homebuyers in Toronto have to pay an additional municipal land transfer tax on top of that. Fortunately, you may be eligible for both the Ontario land transfer tax rebate as well as the Toronto land transfer tax rebate, which add up to a maximum of $5,725; this is something your real estate lawyer can help you determine and calculate.