NICHOLAS CHAN GUIDE TO BUYING
Purchasing a home is one of the biggest financial decisions you will make, whether it is your first home or upgrading / downgrading, it pays to make an informed decision by knowing the right steps and current market conditions. There is a lot to know and this in-depth Buying Guide will take you through all the information that you need to know. Click through the tabs above to find out how to:
- Understand how much you can afford, the amount of down payment and current monthly expenses.
- Learn about the mortgage process, what you need and choose the right lender and terms.
- Start your search and house hunt like a pro to narrow down the right house for you.
- Getting prepared and making an offer, going through negotiation tactics and scenarios.
- Be prepared for the closing process and associated cost to ensure a smooth closing.
How Much are You Spending Now?
Calculate Your Household Expenses
Start figuring out your financial readiness by evaluating your present household budget. How much are you spending each month? Knowing exactly how much, will give you a better idea about whether you can afford to become a homeowner.
Do you know how much money you are spending per month? Calculate all monthly debts or obligations to start.
- Existing mortgage, loans, lines of credit, student loans
- Car loans and leases, insurance and gas
- Personal credit cards
- Mobile phones, cable or internet bills
- Food, Coffee and Misc. Expenses
How Much Can You Afford?
Before you begin shopping for a home, it’s important to know how much you can afford to spend on homeownership. You will want to plan ahead for the various expenses related to homeownership. In addition to purchasing the home, other significant expenses will include heating, property taxes, home maintenance and renovation as required.
There’s a lot to know when it comes to financing your new house or condo. You’ll need to get pre-qualified for a mortgage, make some important financing decisions and of course, eventually choose a lender.
Get Pre-approved for a Mortgage
The first step to buying a home should be finding out how much financing your bank will lend you. To obtain a pre-approval for a mortgage, your mortgage lender / broker will look at your income, your debts and your down payment (From Step 1). A mortgage pre-approval can be obtained from any bank/lender or mortgage broker and will also contain an interest rate guarantee in writing which will be valid for 90 to 120 days.
A pre-approval does not guarantee that you will be able to obtain a mortgage, nor does it commit you to a particular bank or lender. There is a lot that can happen during the pre-approval process to the your homes closing and when the funds are actually lent. Market conditions and interest rates and / or your finances could of changed which could cause you to seek out a different bank or lender. Once you have purchased a house, the bank will need to review the documents, perform an appraisal on the property and review your file once again to determine if they will provide a firm approval on your mortgage.
Getting pre-approved will ensure that you know how much mortgage you can get, which in turn will help you know what price range of homes you should be targeting in your search. It allows you to focus your house hunting efforts, and eliminates the risk and uncertainty of financing once you find your perfect home.
Mortgages can seem intimidating, especially for the first-time buyer. Once you’ve qualified for a mortgage, there are some basic decisions you will have to make before you take possession of your house or condo: Mortgage term, amortization, interest rate and type of mortgage. Read on to find out what all of that means and use our handy Mortgage Calculator to estimate what your payments would be.
Mortgage Term and Amortization
The mortgage term and amortization period affect the amount of money you can borrow (and thus the price of the home you can buy), and dictate how much your monthly payment will be.
This is the amount of time a lender will loan you money for – typically from 6 months to 5 years. When the term is up, the remaining amount is payable in full unless you arrange new financing for another term.
Choosing a mortgage term is tricky and requires you to be knowledgeable about trends in the marketplace, as well as having a sense as to the amount of risk you’re willing to endure. If you choose a 6 month term, and interest rates increase drastically in that time frame, will you still be able to afford your home?
Few (if any) of us can pay off the entire principal of a large mortgage in a 6 month or even a five-year term. Imagine how big your payments would be! To help you out, lenders calculate, or amortize, the mortgage payments over a much longer time, often as long as 25 years. They aren’t loaning you the money for a single 25-year period–they’re just calculating the payment schedule as if it will take you that long to pay back the principal plus interest. You will probably renew the mortgage several times during the amortization period, and you always have the option to change the amortization depending on market conditions or your financial situation. The longer the amortization period, the lower your individual payments will be – but this also means you’ll be paying more in interest.
Most mortgage payments consist of two parts: principal and interest. This is known as a blended mortgage payment. Each payment reduces the balance owed on the mortgage by the portion of the payment that is credited to the principal. Over time, the proportion of your payment that reduces the principal balance will increase. The faster you can pay down the remaining balance, the less total interest you’ll pay. There are many ways you can pay down your mortgage faster, from accelerating your payments (e.g. paying biweekly instead of twice a month, for 26 payments per year instead of 24) to making lump sum payments on your mortgage; your lender can help define the right strategy for you.
The interest rate is one of the biggest contributing factors to how much you end up paying for your home, both on a monthly basis and over the life of your mortgage.
Interest is the cost of borrowing money. Interest rates fluctuate with the economy. The interest rate you commit yourself to at the beginning of the term can have a significant effect on the amount you pay each month for your mortgage. There are two basic types of interest rates used in mortgage products: fixed-rate and variable-rate.
Fixed-rate mortgage – Essentially, this means committing to a single interest rate that will not change for the term of your mortgage. This strategy locks in how much of your monthly payment repays the principal vs. going to interest. Fixed-rate mortgages are great in an economy where interest rates are going up, as you never have to risk paying higher interest rates. But in an economy where interest rates are going down, you could be stuck paying more in interest than the going rate. If only we had a crystal ball…
Variable-rate mortgage – With a variable rate mortgage, the dollar value of your monthly payments is fixed for a specific term, while the proportion of interest to principal floats in relationship to the bank’s prime interest rate. If rates go up, more of your payment is applied to interest and less is applied to the principal. If rates drop, more of your monthly payment is used to pay off your principal and your mortgage is paid off sooner. Variable rate mortgages can protect you if interest rates are high at the time you arrange your mortgage; when rates fall, you’re not stuck with high interest payments, and more of your payment is applied to the principal. But if interest rates increase, that could mean more of your payment is being applied to interest than you bargained for. In some instances, lenders will allow you to convert to a fixed-rate mortgage in this kind of situation.
Types of Mortgages
Conventional mortgage – Aptly named because they are the most common type of mortgage. The lender will loan you up to 80% of the appraised value or purchase price of the property (whichever is lower) and you generally need to come up with the other 20% as a down payment.
Second (and third) mortgages – These are additional financing arrangements behind an existing mortgage, also secured by your property. Secondary financing is generally arranged at a higher interest rate and for a shorter term than the first mortgage.
High ratio mortgage – When you don’t have the 20% down payment required to get a conventional mortgage, a high ratio mortgage can advance you up to 95% of the home’s appraised value or purchase price. However, since you are borrowing more than the usual 80%, the government insists that the mortgage be insured against default, and that you pay the cost of the insurance. That cost can be a few percent of the mortgage amount, and is added to the mortgage principal.
Choosing a Lender
There are lots of kinds of lenders and mortgages out there. It’s a good idea to go to at least 3 lenders:
- Your own bank. They have your bank accounts, credit cards and investments so they should be motivated to give you a good rate.
- A mortgage broker. Mortgage brokers work with a lot of different lenders and will go to them on your behalf to find the best mortgage rate and terms. Usually, broker fees are paid by the banks, so it’s a good way to comparative shop without having to do all the leg work yourself.
- RBC (and ideally, our main man Henry Vincent). RBC doesn’t work with mortgage brokers and we’ve found them to be extremely competitive with rates and mortgage terms. We have yet to find someone who delivers better service than Henry and he’s always available (unlike the mortgage person who works out of a branch from 9-5). If you call Henry, tell him BREL sent you for the very best experience.
It’s important to note that not all of these decisions have to be made before you start looking for a home; the crucial step is getting a pre-approval from a lender—then you’re ready to start the search! Details regarding term, rate and even which lender you use can be decided—and changed—after the actual purchase, all the way up until reasonably close to your closing date (the date you take possession of your new place). However, the more you understand about your options, the better prepared you will be when that magical day comes.
Develop your wish list
Knowing what you need and want in your home is critical. What are your must-haves, your nice-to-haves, and your no-way-absolutely-nots? How many bedrooms do you need? What kind of outdoor space do you want? What about counter-tops, appliances and floors? You can’t get what you want if you don’t know what you want. Of course location will be a big decision – what Toronto neighbourhood makes you feel at home? Check out our Toronto Neighbourhood Guides for some insider scoop on Toronto’s hottest neighbourhoods and make sure to read up on the Best Toronto Neighbourhoods for Return on Investment and the Best Toronto Neighbourhoods for First-Time Buyers.
Of course in a hot market like Toronto’s, compromise is a big part of the process. Almost everyone needs to compromise on something and it usually comes down to 4 things: size, finishes, location and price. What’s most important to you? Would you rather live in a bigger house or closer to downtown? Are you OK spending more money for a renovated house or could you buy a cheaper house and do the renovations yourself? Would you consider living on a busy street to more affordably be in a better neighbourhood with access to better schools?
Search for your home online
You aren’t alone: 94% of Canadians search for their home online. While there are endless real estate websites out there, here are the ones you should consider:
Realtor.ca is the website owned by the real estate association. It pulls available properties for sale directly from the system that agents use, the MLS (multiple listing service). realtor.ca is usually a day or two behind what’s really happening in the market, but a great tool to explore what’s for sale and start to get a feel for what’s available.
Custom Listings from a REALTOR Another way to get quick and easy access to what’s available is to have a real estate agent e-mail you daily listings of available houses and condos that match what you’re looking for.
Tips for looking for a home online:
- Keep an open mind. Photos aren’t always representative of what the house actually looks like in real life.
- Don’t always believe the description and read between the lines. ‘Ready to put your decorator touch on it’ means it needs a lot of work. And ‘Leslieville dream home for under $500K’ probably isn’t really in Leslieville.
- Remember that the asking price is very different than sale price. In a hot market like Toronto’s, houses often sell for far more than the listing price. If you want to know actual sale prices, sign up for our monthly Neighbourhood Reports that give you all the inside scoop.
- If you’re shopping for a condo, keep in mind that what’s included in the maintenance fees varies from building to building, so it isn’t easy to compare condos. A lower maintenance fee might still mean more monthly costs if it doesn’t include heat and electricity.
- Take some time to learn how to read an MLS listing – all those acronyms are guaranteed to confuse you.
House hunting in real life
This is your opportunity to get a feel for the different Toronto neighbourhoods, refine your wish list, and ask questions. While a wish list seems kind of scientific and is a useful tool in deciding which properties to visit, the truth of the matter is that most people walk into their perfect home and just feel it. Of course it helps when it satisfies your needs and wants too, but don’t underestimate the power of ‘just knowing’.
You can visit homes for sale in real life with your real estate agent or by attending an open house. Keep in mind that not all properties will have open houses, so working with a real estate agent you trust is the only way to guarantee that you’ll be able to see the houses or condos you want to see (and on your schedule!).
Making An Offer
Your house hunting efforts have paid off and you’ve found the right home for you: it satisfies your wants/needs, it’s in your price range, and it feels right. The offer process is both exciting and nerve-wracking. We begin by drafting the Agreement of Purchase and Sale. This is a legally binding document which contains everything from the price you are prepared to pay, to the inclusions you want (washer/dryer, big screen TV), to your ideal closing date (the date you take possession), to conditions that need to be met for the deal to go through. Once you’ve submitted your offer, the seller can accept it, reject it or sign back a counter offer. During these back-and-forth negotiations, you may need to compromise on small things but a good real estate agent will work hard to get you what you want. And if you’re in a bidding war, make sure you know the facts about Bidding Wars and How to Win in Multiple Offers.
Once you have a firm deal (both you and the Seller have agreed on price and agreement terms, you’ve submitted a deposit and there are no more conditions to waive), the closing process starts. This will require you to be in close contact with your lender and your lawyer – they’ll need lots of information, and of course, money, from you.
The few days before you take possession are the most critical – you’ll need to sign a lot of paperwork, provide a certified cheque for the balance owing and of course, pick up your keys.
Closing is the point at which the ownership and possession of the property is transferred from the Seller to you. It takes place after all legal and financial obligations have been met. Closing the purchase will be a team effort: in addition to yourself, your lawyer and your lender will all be involved in helping close the deal.
As you go through the process of buying a home, you’ll naturally want to know how much money this will cost you. Your lawyer, accountant and real estate agent can help you estimate your costs. Some of the things you can expect to pay are:
- Down payment (less any money you have already provided as a deposit)
- Land transfer taxes*
- Lender fees, if applicable (appraisal fees, application fees, etc.)
- Adjustments (the seller may have pre-paid taxes, utilities or other expenses past the closing date which you will need to reimburse during the closing process)
- Legal fees (plus applicable taxes)
* If you buy a property in the city of Toronto, you will need to pay a municipal land transfer tax in addition to the land transfer tax in Ontario.
For a detailed list of all the closing costs involved in buying a house or condo in Toronto, check out our blog about Closing Costs.
Your lawyer will calculate the final amount owing, and you will need to provide him/her with a certified cheque for the full amount before the property comes into your possession. (Click here for a description of the role of your real estate lawyer)
If you’re a first time home buyer, you’ll qualify for some great government programs that can save you thousands of dollars in closing costs. Click here for details of first time home buyer programs.