Many people dream of owning a home in Toronto. However, the process can seem so overwhelming that it can be difficult to know where to start. Buying a home is also an expensive endeavour involving many legal and financial contracts. How does anyone manage it? The process can be greatly simplified once you break it down step by step. This guide is intended to help first-time buyers navigate the complex world of financing a home purchase. However, real estate is not something you purchase every day. It never hurts to brush up on your knowledge, even if you’re a seasoned buyer! Let’s take a look at some of the most common financial concepts and what they mean. 

Types of Mortgages

Since few people have enough cash on hand to buy a Toronto home outright, taking out a mortgage is usually essential. There are two types of mortgages to consider:

Variable-Rate: 

A variable mortgage means the interest rate is not locked in. The advantage is that the interest rate is often lower, and you will benefit from any further decreases. But if rates increase, your home can suddenly become more expensive.

When rates go up, your lender may present two options. You can increase your monthly payment and keep the amortization period the same (the length of time it takes to pay off your loan.) Or your payments can remain the same, but you will take longer to pay your mortgage in full.

Fixed Rate:

With a fixed mortgage, your interest rate is locked in for the entire term, generally five years. Fixed rates provide stability, and you can rest assured that your monthly payments will not change even if interest rates rise. The downside is that you also will not benefit from the lower amount should the rates decrease.


Have you been thinking about ways to make your first purchase more affordable? You could consider buying an investment property, which provides rental income to help cover your carrying costs. See some of our investor posts below for more details:


What Should You Choose?

Deciding on a variable or fixed mortgage depends on current events, your financial situation, and risk tolerance. While no one can predict the rates with 100% accuracy, history indicates what might happen. For instance, the Bank of Canada typically raises the rates when inflation is high. If the economy needs a boost, they may decide to lower the rates to encourage more spending, as happened in late 2019 with the onset of the Coronavirus pandemic.

When interest rates are low, it is often beneficial to get a fixed rate to lock it in for as long as you can. When rates are high, making your decision can be more challenging. A variable mortgage will save you money if the Bank of Canada decides to lower the interest rates, but there are no guarantees. 

A fixed mortgage may be the right option if you are comfortable with your payments and don’t want to risk paying more when interest rates fluctuate.

Your mortgage expert or real estate agent can provide you with more details and help you make the choice that best fits your situation.

Pre-Qualification or Pre-Approval?

Now that you know what types of mortgages you have to choose from, how do you go about getting one? The first step is to get either a pre-qualification, pre-approval or both. Here is what each of these terms means:

Pre-Qualification

Are you just beginning to think about your purchase and aren’t sure whether you want to buy a home at all? A pre-qualification is a helpful tool to give you a rough estimate of how much a lender might be willing to provide. It costs you nothing, takes only a few minutes, and there’s no obligation to proceed.

You can simply fill out a form online and answer a few basic questions about your financial situation, such as your income, debts, and the value of your assets. The downside? You will have to take the results with a grain of salt. It is only a rough estimate, and your final approval amount can vary substantially once you actually apply for a mortgage.

Pre-Approval

Getting a pre-approval is recommended for anyone serious about buying in the next few months. The process is much more involved than a simple pre-qualification. You will fill out a mortgage application, and the lender will perform a credit check. Once completed, a pre-approval has several advantages:

  • It’s more accurate. It lets you know how much you will be approved for, presuming your financial situation or employment status doesn’t change.
  • You can lock in the lowest interest rate. Most pre-approvals are valid for 60 to 90 days. You won’t have to worry about rates going up in the meantime. And if the rate goes down, you’re entitled to the lower amount.
  • Your negotiation power increases. When you can prove to a seller that you qualify for financing, they’re more inclined to accept your offer over other potential buyers.

Down Payment and Deposit

Very few real estate terms cause more confusion than the deposit versus the down payment. They sound interchangeable, but there is a difference. The down payment is the entire amount you need upfront before buying a home. In Canada, the rule is you must have 20% for any property priced $1 million or more. 

Down Payment Over $1 Million

Obviously, coming up with $200,000+ is out of the question for many first-time buyers. However, as soon as you’re looking at a house for less than $1 million, your purchase becomes far more affordable. 

Down Payment Under $1 Million

In that case, you need 5% on the first $500,000, which works out to $25,000. Then you need 10% on any amount between $500,000 and $999,999.

Let’s imagine you’re looking at a home priced at $950,000. Your down payment works out to $25,000 + $45,000, for a total of $70,000. That may still seem like a lot of money, but it’s much less than the $200,000 needed upfront for a $1 million property!

The total price is only $50,000 lower than the million dollar mark. And yet, the purchase is far more accessible because the down payment is so much less!

Raising the down payment is challenging for many first-time buyers. However, government programs such as the First-Time Buyer’s Incentive and the Home Buyer’s Plan can help!

Once your purchase closes, the down payment is transferred to the seller along with the funds from your mortgage.

Deposit

The deposit is the portion of the down payment you make as soon as a seller accepts your offer. It’s usually 3-5% of the purchase price and is held in a real estate trust fund until the closing date.


Buying your first home has many unique challenges, and it’s not just about the money. Here are some other posts that can help:


Closing Costs

When buying a home, the closing costs sometimes catch first-time buyers off guard. You should always allow an extra 3-5% over and above the purchase price to cover these costs, which include lawyer’s fees, utility hookups, and home inspection costs. You can roll many of these expenses into your mortgage. However, the highest closing cost, the Land Transfer Tax, must be paid upfront before your transaction closes. Fortunately, as a first-time buyer, you’ll benefit extensively from the First Time Buyer Land Transfer Rebate. This instant rebate can save you up to $4,000, making your closing costs more manageable.

Now that you understand the financing process, you’re ready to begin the fun part of buying a house! It’s time to dream about what you want in your first home and start scouring the listings.

If you’re ready for the thrill and responsibility of homeownership, we are happy to get you started. Helping new buyers achieve the milestone of owning their first home in Toronto is one of the most satisfying aspects of our business. You can book a meeting with us below for a free consultation with no obligations.