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Mortgages are useful tools that make it financially possible for consumers to purchase a home. And when it comes to homes in Toronto, any financial help homebuyers can get is certainly welcomed.
Read on to find out all you need to know about mortgages in Toronto.
Mortgage Insurance Rules
If you plan to make a down payment of less than 20% of the purchase price of the home you’re buying, then you’ll be subject to paying mortgage insurance. Also referred to as “CMHC insurance,” this type of insurance is designed to protect the lender – not the borrower – despite the fact that borrowers are the ones paying the premiums.
In Toronto – and Canada as a whole – the maximum amortization period for mortgages that are insured is 25 years.
How to Save for a Down Payment in Toronto
Whether you’re looking to put down at least 20% to avoid paying mortgage insurance or are simply looking to put down the 5% minimum that conventional mortgages require, you’ll still need to come up with a sizeable amount of money. Based on the average home price in Toronto, which stands at $765,400 as of November 2018, a 5% down payment would amount to $38,270.
That’s a lot of money for the average person in Toronto to have to come up within as a lump sum of cash, but that’s the reality of buying a home in one of the most expensive markets in the country.
Obviously, putting a 20% down payment is better, if you can swing it. Not only will you be able to reduce the amount of debt that you’d have to borrow, but you’ll also be able to save quite a bit of money on mortgage insurance that would otherwise have to be paid with a down payment of less than 20%.
Need to borrow money for your down payment? Check this out.
In order to secure a mortgage in Toronto, you will need to spend some time saving up for a down payment. Here are a few tips to help you accumulate such a large sum of money in order to get approved for a mortgage and make a home purchase:
Take a bit of money out of each paycheck – Toronto may have the second highest minimum wage in Toronto, but saving up becomes difficult due to its high cost of living. So, before you go and start spending your paycheck, set a little bit aside to be deposited into a separate “down payment savings” account.
Automate your savings – Piggybacking off the above tip, rather than manually taking out a certain amount of money from your paycheck, consider automating your savings instead. That way you won’t be tempted to use that money for other expenditures. Plus, there will be no excuses for forgetting.
Make small sacrifices – Think of things that you can sacrifice for a little while to help with your down payment savings efforts. For example, if you’ve made it a habit of buying lunch every day, consider taking your own lunch with you – you’d be amazed at how much eating out in Toronto costs.
Plan any shopping splurges – Instead of randomly splurging, consider planning them instead. If you try to restrict yourself a lot when attempting to save, you can easily convince yourself that you deserve a treat once in a while. But this can blow your budget and move your goal further out. Instead, if you plan for that splurge money, you’ll know precisely how much you have to spend on frivolous things and keep more control of your spending.
Take a look at this infographic to learn about the cost of buying a house.
Credit Score Required For a Mortgage in Toronto
Mortgages in Toronto require a certain credit score in order for borrowers to get approved. In Toronto, borrowers are required to have a credit score of at least 650 to 680 in order to secure a conventional mortgage, though every lender in Toronto might have their own specific criteria.
Toronto borrowers with higher credit scores typically have a sound financial past that is void of any black marks, such as missed payments. As such, they will be more likely to be responsible and capable enough to make mortgage payments on time and in full every month.
On the other hand, a person in Toronto with a low credit score typically means they’ve had a history of bad financial habits, making them more of a risk for lenders. In this case, the odds of mortgage approval are much lower. If a mortgage is approved, the interest rate provided will likely be much higher than that of a mortgage provided to a borrower with a higher credit score.
Alternative Mortgage Options For Bad Credit Consumers in Toronto
What can you do if you don’t meet the credit criteria that lenders in Toronto require for mortgage approval? Are your dreams of homeownership dashed? Not necessarily. There are some other options that you may want to explore when applying for a mortgage in Toronto with a bad credit score.
Get a cosigner – If you have someone in your life who has good credit and whom you trust, consider adding them to your mortgage contract as a cosigner. This is a big responsibility, so the person cosigning needs to be fully aware of what their role is and what the repercussions may be if you default on the mortgage. A cosigner essentially promises to pick up the slack and continue making your payments for you in the event that you fail to make your payments.
Take out a bridge loan – Bridge loans are useful tools that you can use if you find it difficult to get a mortgage in Toronto because of your bad credit score. They are provided by private lenders and offer short-term solutions to those looking to make use of the borrowing potential of their homes. Bridge loans are designed to improve your credit and help you get approved for a mortgage and a lower interest rate.
Wait and improve your credit score – If you have some time to spare and are not necessarily in a rush to buy a home, consider taking some time to improve your credit score. You can do this by:
- Ensuring your debt payments are made on time
- Not applying for too many credit accounts at once
- Utilizing less than 30% of your credit card limit
- Paying down your debt
- Keeping old credit accounts open, even if you’re not using them
Interested in more information about your credit score? Check this infographic out.
Hidden Costs of Buying a House in Toronto
Buying a home in Toronto involves a lot more than just taking out a loan to cover the purchase price of the property. There are other hidden costs that all homebuyers should be made aware of before taking the plunge:
- Down payment
- Title insurance
- Home insurance
- Home inspection
- repaid utilities
- Moving costs
- New furniture and appliances
- Real estate commissions
It’s important to make sure that you account for all of these costs before you commit to a real estate transaction.
Read this for more details about these hidden home buying costs.
Getting Pre-Approved For a Mortgage in Toronto
If you’re thinking about buying a house in Toronto soon, you should consider getting pre-approved for a mortgage first. A mortgage pre-approval is somewhat like a promise letter from the lender stating that you may qualify for a mortgage for a specific loan amount based on the information you provided, including proof of income and your credit history.
A pre-approval typically specifies a term, interest rate and loan amount. It’s a good idea to get pre-approved before looking for a home because it will tell you how much you can afford. This will help you narrow your focus to properties that match your criteria in terms of price. A pre-approval will also make you a more competitive buyer in the eyes of sellers, which can come in especially handy in a fiercely competitive market.
Pre-approvals don’t last forever. Instead, they usually expire within 90 to 120 days, after which the borrower will have to get pre-approved all over again.
Should you spend your entire pre-approval amount when buying a home? Find out here.
How to Compare Different Mortgage Offers in Toronto
It’s always recommended to shop around for a mortgage and compare different products from different lenders to get the best deal. When you do, it’s important to pay attention to certain components of various mortgage products that may be offered to you, including:
- Term – The time period that the mortgage contract is valid
- Amortization period – The time frame where the entire loan amount must be repaid in full
- Variable vs. fixed rates – Different mortgages come with different types of interest rates
- Prepayment options – Some mortgage products may allow you to prepay without penalty
- Early payment penalties – If you choose to pay off your mortgage early, find out what the early payment penalties may be if any
An amortization period is the length of time that you have to pay off your entire loan amount in full. The amortization period you go with will depend on what you feel most comfortable with and what your lender will offer you.
Shorter amortization periods will allow you to spend less on interest over the long haul and will allow you to pay off your mortgage sooner. However, the monthly payments are usually higher, making them more expensive over the short-term.
Longer amortization periods, on the other hand, cost less per payment, but they end up costing more over the long run because more interest will have to be paid. In addition, it will take longer to be mortgage-free with a longer amortization period.
What’s the difference between a mortgage term and a mortgage amortization? Find out here.
Mortgage Payment Options
Different payment options are typically available with mortgages Toronto, including the following:
- Accelerated bi-weekly
Types of Mortgages Available in Toronto
There are several different mortgage types in Toronto that you can choose from, including the following:
- Conventional mortgages. These require a 20% minimum down payment, which will allow you to avoid having to pay mortgage default insurance.
- High-ratio mortgages. Conventional mortgages with less than a 20% down payment (but no less than 5%) are known as high-ratio mortgages and will require mortgage default insurance to be paid.
- Open mortgages. These home loans allow borrowers to repay the mortgage at any time without penalty.
- Closed mortgages. These cannot be paid off before their maturity date without penalty, though their interest rates are usually lower than those with open mortgages.
- Fixed-rate mortgages. The interest rates associated with fixed-rate mortgages will not change throughout the term, making the payments more predictable.
- Variable-rate mortgages. The interest rates associated with variable-rate mortgages can change at different intervals throughout the term, making the payments more unpredictable.
Get the Best Mortgage Product For Your Financial Situation
There are all sorts of different mortgage products and lenders in Toronto, and the one you choose should closely match your particular needs. If you’re in the market to find and apply for a mortgage in Toronto, Loans Canada can help match you with a licensed mortgage professional.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.