Perhaps the most important thing you’ll need to do before you start looking at houses is determining what mortgage payments you can afford, as this will determine what price range you can consider.
As a mortgage agent, I can help you with this by examining your debt to income ratio and your down payment.
Keep in mind that ideally, your total annual housing costs (including mortgage payments, hydro, water, etc.) should be a maximum of 39% of your gross annual household income. Also remember to add condo fees to your calculations if you are looking at condominiums.
Your combined annual debt payments and housing costs should also ideally be no more than 44% of your gross annual income.
Often one of the most difficult parts about buying a home is saving up enough money to use as a down payment.
Lenders require only a minimum of 5% of a home’s sale price for a down payment, however, if you have the money to do so, it’s recommended that you put down more to help reduce your mortgage payments and secure more equity right off the bat. Also keep in mind that any amount under 20% requires you to obtain default insurance.
When it comes to saving up for a down payment, this can be difficult to do, which is why many first-time homebuyers receive financial help from a family member. While this is a great way to come up with the money for a down payment, it’s important to note that lenders require more than just a down payment in order for you to qualify for a mortgage. You will also need to show that you can afford the mortgage payments based on your Gross Debt Service (GDS) ratio.
Many lenders will also require you to disclose where the money for your down payment came from. In many cases, if you received all or part of your down payment as a gift, then the benefactor will need to sign a letter to confirm this.
The First Time Homebuyer Incentive program is also an option to help you put more money down in order to decrease your mortgage payments.
The incentive allows you to borrow 5% or 10% of your home’s purchase price from the government to be used towards your down payment.
You will also need to come up with at least 5% for your down payment (if you are purchasing an existing home), which the government will match to bring your down payment up to 10%. If you are purchasing a brand new home, you will get 10% from the government on top of your 5%, bringing your total down payment up to 15%.
The result is a shared equity mortgage, which means you must repay the same percentage of your home’s value that you borrowed from the government upon selling or within 25 years, whichever comes first. This means that if the value of your home increases, the amount you have to repay will increase.
For example, let’s say you purchased your home for $300,000 and borrowed 5% of that ($15,000) through the First Time Homebuyer Incentive. By the time you are ready to sell, your home’s value may have increased to $350,000. This means that the amount that you have to repay has increased to $17,500.
For first-time homebuyers with a steady income and good credit, qualifying for a mortgage with the best rates and terms is typically not very difficult.
When evaluating borrowers, lenders look at a few key factors, like:
So, if you have lower credit and irregular income, this could potentially be seen as a red flag for borrowers. If you are concerned about qualifying for a mortgage, speak with a mortgage broker about your options.
When shopping for homes in a hot real estate market, you will likely be facing a lot of competition when putting in offers. For this reason, it’s important to make your offer as appealing to the seller as possible. One way to do this, besides offering above asking price, is to obtain pre-approval for a mortgage. unprecedented circumstances, life doesn’t stop just because there is a pandemic, and your mortgage agent, realtor, and lawyer are all remaining here to help you navigate your real estate-related goals.
Pre-approval is when a lender states in writing that you have qualified for a mortgage loan of a certain amount based on your income and credit history and that they are willing to give you a loan. This is a great way to make your offer stand out, as it assures the seller that there is a low risk of you having to back out of the sale during the conditional period due to lack of financing.
Fixed vs. Variable
Fixed interest rates remain the same for the entire duration of your mortgage term. Fixed interest rates tend to be higher than variable interest rates, but can be beneficial as:
Your payments are guaranteed to remain the same and will not change over time unless you choose to increase them
You’ll know ahead of time how much of your mortgage (principal) will be paid off at the end of your term
Variable interest rates, on the other hand, tend to be lower than fixed, but can increase and decrease throughout your term as the market fluctuates. This can be beneficial, as it can mean lower payments when rates are low. However, if rates spike, your payments can end up being significantly higher.
Different Term Lengths
Most lenders offer terms that range from 1 to 10 years. However, most lenders also have three primary terms that are priced competitively, the 3-year fixed, 5-year fixed, and 5-year variable.
While you can have an amortization between 5 and 30 years with best rate lenders, the most common amortization is 25 years or 30 years. However, it’s important to note that the 30 year amortization is only available if you have more than 20% of the purchase price as a down payment.
Keep in mind that your amortization period affects your mortgage payments, so if you have a shorter amortization, your payments will be higher. Also remember that a longer amortization period means lower payments, but you end up paying more in interest in the long run.
Open Vs. Closed
The main difference between open and closed mortgages is the amount of flexibility you have to pay your mortgage off in full.
The open mortgage allows you to pay the mortgage off in full at any time without any mortgage penalties. It also usually has a much higher interest rate. However, with an open mortgage, interest rates tend to be higher than closed.
Open mortgages are typically only used in very specific cases where the mortgage loan will be paid off very quickly. Around 99% of mortgages are considered closed mortgages.
With a closed mortgage, you typically don’t have this kind of flexibility, as the amount of extra money you can put towards your mortgage is often limited and paying your mortgage off in full may come with a prepayment penalty.
An upside is that closed mortgages tend to have lower interest rates than open.
Most mortgages today are closed with pre-payment privileges, however, many lenders will allow you to pay 15% to 20% of the original mortgage amount each year on top of your normal payments. They may also allow you to increase your monthly payments by 15% to 20% of the previous monthly payment.
Closed mortgages with prepayment privileges are often flexible enough for most borrowers as they enable you to pay off your house in fewer than 5 years. However, most Canadians do not have the financial means to do this.
The cost of purchasing a home is more than just your down payment. There are legal fees, transfer fees, disbursements, and other fees known as closing costs.
Closing costs are due on the day the buyer officially takes ownership of the home. Lenders usually want to see that you have 1.5% of the purchase price in savings on top of your down payment to go towards closing costs.
As a first-time homebuyer, you may be eligible for the Ontario Land Transfer Tax Rebate, which provides first-time homebuyers with a discount on land transfer tax up to $4,000. If your land transfer tax comes out to more than $4,000, you will need to pay the remaining balance.
Here is an overview of closing costs you can expect:
While I have provided a brief overview of some of the most important information about buying your first home, there is so much more that you’ll need to learn and absorb throughout this process. For this reason, it’s important to leverage the right team of professionals to guide you every step of the way – including a mortgage broker.
Besides helping you obtain a mortgage, a mortgage broker can help you navigate the home buying process and explain the details of the first-time homebuyer’s programs available to you and how to apply.
This includes the:
Lastly, as a home buyer, I want to see you represented only by the best professionals in the industry. If you would like, I can introduce you to various professionals including a: