The Ultimate First Time Home Buyer Guide in GTA

First-time homebuyers in GTA (Greater Toronto Area) have a lot to learn to make their home investment lucrative and satisfying. The more you know about how to go about buying a home, the better decision you will make.

Why Toronto?

The real estate market of Toronto is growing a lot recently and seeing the increase in Toronto real estate market makes it a stable investment. It is a perfect chance to build an asset that will grow in value and allow you to reap real financial benefits.

It is not unusual to hear about the buyer’s stories who are bidding wars over the Toronto area homes. Prices are touching skies and as per the GTA market update, it will continue to do so. Thus, making a real estate investment deal in the Toronto region is certainly profitable.

Here’s a buying guide in GTA-

Building a property is not an easy feat. It takes hard work, time, and dedication. Consider the following steps to make your property buying decision worthwhile.

Step 1: Is buying a home right for you?

As a first-time homebuyer, you must ask yourself whether you are prepared to buy a home. Is your current financial situation allowing you to purchase a home? Will you be able to manage your financial and lifestyle needs?

These questions are vital because homeownership is expensive and here are a few costs that you should know about.

  • Upfront cost: When you buy a property you need to make upfront payments like the down payments, closing costs, and applicable taxes.
  • Ongoing Costs: Living in your home will result in expenses and you will have to shell out mortgage payments, utility bill payments, taxes, insurance, payment for routine repairs, and home maintenance are a few to name them.
  • Repairs: When you buy a property there are some large expensive repairs that you cannot ignore. For example, roof repair or maintenance, foundation repairs, plumbing repairs, etc. The property needs to be renovated after a few years as well. There may be some additional maintenance costs if you choose properties that are not linked to the municipal services so for sewer and water you have to make extra payments.

Step 2: Should you rent a property or buy?

Firstly, ask yourself, is it ok to buy a home or should you stay on rent. Secondly, if you decide to buy a home then is it for renting purposes, or do you want a home for yourself?

Renting the property means there will be less maintenance and repairs and low monthly or upfront costs. You will be protected in case the property price falls. You can also free up the cash to save it and keep a large number of down payments for a home you can think of buying in the future. However, the monthly payments will also increase yearly. There is a risk that the lease cannot be renewed and you cannot paint or remodel the home until the landlord gives permission.

On the other hand, buying a property is a different scenario altogether. You can remodel and renovate it as per your choice and it will be your secure investment and hence you can rent it out to earn as well. You have control over your home. The disadvantage is you will have to bear the expenses in case the property loses its value and you need to pay mortgage principal and property taxes, interest, and maintenance. There can be unexpected repairs and sometimes these are very costly.

“Think about both things in detail and make a decision.”

Step 3: How much can you afford?

Figure out how much you can afford to spend on your home as the mortgage payment is a big expense. You do not want distressing surprises so considering all the costs is a wise thing to do. Analyze your current financial situation and be prepared for the unforeseen as well.

Calculate how much you are spending now and look closely at the monthly expenses. Make use of the online calculators to work on your household budget that will include expenses like clothing, groceries, gift, credit cards, child care loans, personal loans, housing maintenance, entertainment expenses, etc.

Deduct these from your monthly house income and figure out the budget for your home mortgage payments, maintenance, repairs, etc. Have something additional for emergencies.

Step 4: Calculate the down payment

For a down payment, you must put 5% or 10% of the purchase of the home as paying the down payment will lower the cost of the mortgage and homeownership will become more affordable.

  • How much down payment do you need?

Generally, a minimum down payment of 5% is a must for a property that has a value of $500,000 or less, and a 10% down payment is a must for anything above $500,000. Remember you have to prove the sources from where you get the down payment like the RRSP withdrawal, gift from any family member that you do not have to pay back, funds borrowed on any proven assets, etc. The qualifying criteria for this must be cross-checked with your lender.

Method 1: The monthly housing cost should be 32% or less of the average gross before-tax monthly income. The percentage is called GDS(Gross Debt Service) ratio or debt-to-income ratio. CMHC (Canada Mortgage and Housing Corporation) restricts home buying to a 39% GDS ratio to get approved for an insured mortgage. Housing costs include the monthly mortgage payment (Principal and interest), Heating expenses, property taxes, 50% of condo taxes if applicable, 50% of homeowners association fees (if applicable), 100% of the site rent for leasehold tenure

Method 2: As a general rule the total monthly debt load must not exceed 40% of the average gross before-tax monthly income. This percentage amount is the total debt to income or total debt service (TDS) ratio. CMHC restricts the homebuyers to a 44% TDS ratio to get approval for an insured mortgage. The monthly debt load includes housing costs that are calculated by using method 1, car loans and leases, credit card payments, line of credit payments, other mortgage payments.

Step 5: If the down payment is not enough take advantage of different Government programs

For first-time home buyers, it is not easy to save a down payment. They can take the help of government programs where they need a minimum down payment for an insured mortgage to apply the financial portion of the home purchase using a shared equity mortgage. If you have less than a 20 % amount saved for the down payment then probably you will need the mortgage loan insurance as this will protect the lenders and banks against the mortgage default risk.

The program gives 5 to 10 percent of the purchase price of the home that can be used as a down payment. This is like an addition to the down payment and hence it will keep the cost of mortgage very low and make homeownership easy for you.

An incentive: The Canadian Government will share in property appreciation or depreciation. This is calculated according to the recent property value in the market during the repayment time.

Step 6: Look at your budget

After planning your finances and analyzing all the expenses and savings look at your budget to understand your financial situation. If the monthly housing costs are more than 32% and a load of debt is more than 40% then qualifying for the mortgage is not going to be easy. So here are is Step 7 that you can consider.

Step 7: Get pre-approved mortgage

A pre-approved mortgage is best before you start looking for a house but it is important to understand what this is. A pre-approved mortgage is a blessing for first-time homebuyers as it will help you know how much will you be able to afford and how will the interest rate and monthly mortgage payments look like. With a pre-approved mortgage, you will be able to understand that what kind of home you should go for, what home size and neighborhood you should prefer as per the budget. After this, the evaluation of the selected property by your needs to be done to get the price and condition of the home that are acceptable to your lender.

Meet the lenders to understand the mortgage payment terms and conditions. Understand how can you get mortgage approval and what all you have to work upon to get the loan approval. Make changes to your budget and see will it be better to save for a few years and then buy a home or you can invest in a low-budget property. See how your credit score looks like and how you can improve it to get the best interest rate on the mortgage.

Step 8: Some important mortgage terms that you must be familiar with

There will be many options when it comes to mortgage selection. The lender will help you understand the terms and conditions but there are a few terms that you must know and a mortgage broker will discuss with you.

  1. Amortization Period: Period you choose to pay off the mortgage (usually 25 years)
  2. Mortgage term: The period for which a particular interest rate is applicable can be between 6 months to 10 years and once the term is over you can think of renegotiating the mortgage and choose different or same options as per your comfort.
  3. Payment schedule: How many times do you plan to pay for the mortgage in a month? It can be weekly, bi-weekly or monthly. The lender will discuss all the possible options.

Step 9: Types of Mortgage that you can consider

You can consider different types of mortgage written below:

  • Open Mortgage: It will help you pay off the mortgage in part or full without any penalties.
  • Closed Mortgage: There will be limited or no option of paying off the mortgage in full or paying the mortgage early or in parts. This has a low-interest rate.
  • Conventional mortgage: A loan that is equal to or less than 80% lending value of the home. You have to make a down payment of 20% here.
  • High ratio Mortgage: A loan that is above 80% of the lending value of the home. Here the down payment can be less than 20% but in most cases, the need for mortgage loan insurance will be there so check step 5.

Conclusion: Investments are risky and home buying is not an exception. Do your adequate search and assess all the critical options so you know the basics of the real estate buying process . Your goals should be clear and these steps will help you make better investment goals and prepare you for buying your own home one day. You must use the calculators to understand the budget and financing options that you can go for during the home buying process and make a wise decision.

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