The process of purchasing a home in Toronto can be a bit overwhelming, particularly if you are a first-time home buyer. When we start working with new buyers, we send out weekly ‘buyer education’ emails so that our clients have easy access to important information, and we break it down into digestible chunks so it is not quite so overwhelming.
With that in mind, we thought we would start a series of educational blogs, covering all aspects of the buying process in Toronto. Since this is the first in the series, we are going to start at the beginning - getting your finances in order!
Pre-approval
First things first, you will need to get pre-approved by your bank or mortgage broker. This is an important first step because you don’t want to fall in love with your dream home just to find out that the bank won’t lend you the money to buy it! You will have to provide them with tax returns, proof of income, and a list of all your assets and liabilities. The lender will then put you through a ‘stress test’ to ensure that you would be able to carry the mortgage even if interest rates rise. They will approve you based on the rate they are offering plus 2%, or the benchmark rate of 5.25%, whichever is higher. Here is a handy mortgage affordability calculator to help you determine how much you can afford. Also important to keep in mind is that there are stricter qualifying requirements for self-employed individuals.
Whether you go through your bank or a broker, they should walk you through the different products they offer, the difference between a fixed and variable rate mortgage, along with their corresponding interest rates, the varying amortization periods, and pre-payment options. Once you have been approved for an amount and have decided which product is the best fit for you, the lender will provide you with a pre-approval for that amount at the current interest rate, for a period of 90-120 days. In the fast-paced Toronto market, this pre-approval is also important because it allows you to submit an offer without a condition on finance.
Mortgage Insurance
A conventional mortgage is considered to be a mortgage with a downpayment of at least 20%. If the home you are purchasing is over $1,000,000 then a 20% downpayment is required. If the purchase price is less than $1M and you don’t have 20% to put down, you can put down 5% on the amount up to $500,000 and 10% on the amount between $500,000-$1M. In this case, the mortgage would have to be insured through CMHC, Sagen, or Canada Guaranty. You can calculate the cost of the insurance premium here.
First Time Buyer Incentives
Home Buyers’ Plan (HBP)
This government program allows first-time buyers to withdraw up to $35,000 from their RRSPs, without being taxed on it, to buy or build a qualifying home. The money has to be paid back into your RRSP within 15 years, starting 2 years after the initial withdrawal. A first-time buyer is defined as someone who has not owned a principal residence or someone who has not owned or sold a home in the past 5 years. To qualify the home must be a principal residence and the money can be withdrawn up to 30 days after buying a home. You can find more information on the HBP here.
Land Transfer Tax Rebates
Land transfer taxes are a large expense that must be taken into consideration when purchasing a home. When purchasing a home in Toronto, buyers are subject to both a municipal and provincial land transfer tax so the amount can be staggering - for example, the LTT on a $1M home in Toronto is $32,950. Here is a calculator to determine what the land transfer taxes would be based on the purchase price.
First-time home buyers in Ontario can receive a land transfer tax refund of up to $4,000 and first-time home buyers in Toronto can receive an additional municipal land transfer tax rebate of up to $4,475..
First Time Home Buyers Tax Credit (HBTC)
There is also a First Time Home Buyers Tax Credit (HBTC), which offers a $5,000 non-refundable income tax credit amount on a qualifying home acquired during the year. For an eligible individual, the credit will provide up to $750 in federal tax relief. Learn more here.
First-Time Home Buyer Incentive
The First-Time Home Buyer Incentive helps qualified first-time homebuyers to reduce their monthly mortgage payments without adding to their financial burden. The program offers 5 or 10% of the home’s purchase price to put toward a down payment. This portion is a shared-equity mortgage with the Government of Canada which means that the government shares in both the upside and downside of the property value, up to a maximum gain or loss equal to 8% per annum (not compounded) on the Incentive amount from the date of advance to the time of repayment. The additional down payment lowers mortgage carrying cost, which makes homeownership more affordable. First-time homebuyers purchasing a home in the Toronto Census Metropolitan Area are now eligible for an increased Qualifying Annual Income of $150,000 instead of $120,000, and an increased total borrowing amount of 4.5 instead of 4.0 times their qualifying income. Learn more about this program here.
Deposit
Once you have your finances in order, it is time to start looking at some houses! When you find a home that checks all your dream home boxes and decides to move forward with an offer, there will be a deposit required. A deposit is different from a downpayment, a deposit is an amount you submit either with an offer (herewith) or within 24 hours of acceptance of the offer (upon acceptance). This amount is deducted from the downpayment, the balance of which is paid on closing.
In Toronto’s fast-paced market, deposits are often expected herewith so you should be sure to have this money readily available and be available to go to your bank to obtain a draft made out to the listing brokerage. This deposit is held in trust by the listing brokerage until closing. Typically a deposit is about 5% of the purchase price.
If you have any questions about purchasing your first (or second or third) home, please feel free to reach out - we are always available for your questions! And stayed tuned for the next blog in our buyer education series.
