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Financing Your Home Purchase

 

There is a lot of money involved in buying real estate, find out how to get pre-approved, where to go to find a lender and how to budget accordingly.

Before you can start your home search you need to figure out how you are going to finance the purchase. There are multiple avenues available to Toronto real estate buyers to find the most suitable mortgage for their property.

 

Shop around for a rate.

This is a big plus that buyers should take advantage of. You have the ability to visit different banks and mortgage brokers and find out who has the best terms and rates. Remember, just because someone offers you the lowest rate doesn’t mean they are offering you the best terms. You should pick the financing that best fits your financial capabilities.

 

Getting a pre-approval.

Receiving a promise from a lender guarantees you a rate for only a certain number of days. Once you secure a rate, this is your cue to find the property you will buy since you only have a window of time during which the offered rate is valid (usually 60-90 days). You should visit a few banks and a few mortgage agents. We have some great resources to tap into to help you out.

 

Keeping an eye on your credit rating.

Your credit rating fluctuates depending on how you manage your money. So once you’re in the market for a home, remember to keep your large purchases to a minimum. For example, don’t buy a car while you have the mortgage pre-approval because this can alter your borrowing abilities. Try to keep a low purchasing profile while you have the mortgage pre-approval since the lender promises you the rate and terms based on your borrowing ability at the time of the pre-approval. Try to maintain the same profile while house shopping.

 

How much to put down.

As a general rule, contributing a larger down payment is the best way to go, however sometimes that is not possible. The reality is, the longer you wait to save up for a larger down payment, the more prices will climb in Toronto. So if you have enough to put down to purchase a condo or house, don’t wait to buy, put down what you have now. You can always get mortgage terms that allow you to put down lump sum payments so you can add to your equity as time goes on. This way you start contributing to your equity instead of continuing to pay your landlord. In the future, you will always have a chance to upgrade properties but at the moment you already have an opportunity to own even if your down payment is only at 5%

 

Budgeting.

There are many, many ways to save and whether you pay yourself first or last the point is to actually have some action in your bank account for that down payment. Click here to read our blog about saving for a down payment.

 

Mortgage language defined:

Closed or open mortgage. You can either get a closed or open mortgage term. The term can be for 6 months, 1 year, 2 years, etc. The most popular term is 5 years, close to 70% of home owners have a 5 year mortgage term. This term is a contract between you and the lender for that many years. You can either have a fixed or variable rate during this term but the amount of time is locked during a closed mortgage. This means that if you decide to break the contract you will be asked to pay a penalty and sometimes that is a hefty fee. This is one reason why we always recommend you shop around for mortgages - penalty payments vary with every lender. If you decided to sell or refinance during the term and are forced to break the term - expect to pay up some cash. On the contrary, an open mortgage doesn't have this caveat, you can pay back the money you borrowed at any time. The catch? Interest rates and contract conditions are more stringent in an open mortgage

 

Fixed or variable rate mortgage. You have a choice of either locking in an interest rate or leaving it to fluctuate with the market. There are pros and cons to both of course and a lot depends on your risk tolerance and the economy. If you have a fixed rate, your rate will stay exactly the same throughout the mortgage term. If your rate fluctuates that means that your payments may change as the rate goes up or down. 

 

Amortization. This is the number of years over which your mortgage payments are spread over. The longest amortization term available in Canada is 25 years. You can choose your amortization period which allows you to increase or decrease your mortgage payments.

 

Rate hold. When a lender pre-approves you for a mortgage, they are promising you the rate and terms for a specific number of days and you must apply that rate to a purchase within the time frame you are given. Usually the pre-approval is good for 60-90 days.

 

Affordability ratios. Lenders look at two ratios when determining how much of a mortgage you can afford. Think of this as the mathematical equation of how far your earnings and expenses can take you in securing a mortgage.

  • GDS (Gross Debt Service) Ratio – This is calculated by adding Mortgage Principal + Taxes +Heating expenses and dividing by your Annual Income. This ratio is used to determine your monthly housing costs in relation to your income. This ratio must be smaller than 32%

 

  • TDS (Total Debt Service) Ratio – This ratio is calculated by adding your Housing Expenses + Credit Card Payments + Car Payments +Loan Expenses divided by your Annual Income. This is a more global ratio determining how your earnings compare to your expenses. This ratio should not be over 40% meaning you should not spend more than 40% of your earning on your expenses

Payment frequency. This determines how often you make mortgage payments. You can do monthly, bi-weekly or accelerated by weekly which allows you to fit in an extra payment. All these terms will be discussed in detail with your lender.

 

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