Are you planning to buy your first home in Toronto or anywhere else in Canada? First of all congratulations. Owning a home is always an exciting part of one’s life and its a new milestone you’ve set for yourself. But there are quite a few caveats you need to take care of before closing the deal.
First, always get the pre-approval from the financial institution you deal with. By doing so, you know the budget of the house before you start looking out for. In fact, many of the mortgage brokers in Toronto ask for this in the first place.
Second, keep all the documents ready. There are numerous websites if you google for this topic. Keep everything handy and ready. It only makes things so much easier for you.
Third, do not rush in closing the deal. Especially in a city like Toronto, I’m sure it’s pretty tight and every home on sale gets a couple of offers before its closed. Never for once have I heard any property sell before its asking price. It’s always in multiple increases before the deal is closed. Such is the market and times. Yet, be slow, calm and make sure you are comfortable before closing the deal.
Do not rush until you inspect the property thoroughly and be within your budget. It can get a bit ecstatic to go over the budget but remember you are in for 25 years of mortgage payments, so make sure you think before doing something.
Are you looking to purchase your first home? Here are the real-life scenarios and practical tips with the overall planning and execution when it comes to purchasing your first dream home in Canada.
5% Down Or Save For 20% and Avoid CMHC?
For an average 1+Den or 2 Bedroom Condo in Downtown Toronto, the cost is about $600,000.
20% down is $120,000.
Do you think you are ready for the investment and move into your first home or the purchase decision.
well, what if you can’t afford to pay the 20% down payment? Let’s look at all the Pros and Cons here.
First of all, the minimum down payment to buy a home in Canada or Toronto is 5%, not 20% (there are extra insurance costs with CMHC of course).
So people use lower down payments of 5%, or take family’s financial help or already have a house they bought some time ago for way less, or both in the couple have high-paying jobs or some combination of these.
Real Case Scenario To Afford Your First Home
In Ontario where I’m located, the minimum downpayment is 5% up to $500k and 10% for anything over that.
So for the mortgage of $600,000, you are looking at about a 6% down payment.
As a side note, anything over $1M requires a minimum of 20% down payment. High-ratio mortgages (<20% downpayment) also fetch better interest rates because they’re insured under the CMHC.
Right now for most lenders, it’s 1.99% vs. 2.29% interest rates so the difference isn’t as much as you think it is.
This leaves us with two options:
1. Go for the 6% downpayment on $600k at 1.99% mortgage rate which equals $2583/month or
2. Save money for the 20% downpayment and avoid the additional cost of CMHC Insurance on $600k at 2.29% or $2175/month
It all nails down to what you feel you are comfortable with.
You might also need to consider that $410/month isn’t that bad of premium to pay to live in your own place.
Instead of waiting to accumulate more money towards 20% down, you can always go ahead with the 5% down or how much you can afford to move into the first home. Always remember your home value especially in Toronto will fetch you far more than what you’ll be investing in the property today.
Always remember, never buy that fancy car, it’s not worth your money. Instead, never think much about buying your first home. You will never regret your decision in doing so.
If you end up waiting years for a larger down payment, it will only result in a more expensive house… and a larger mortgage payment at the end of it. It’s definitely not worth chasing a 20% downpayment that’ll rise much faster than you’re able to save just to avoid paying a small price on mortgage insurance or CMHC. In fact, the CMHC insurance protects you from the uncertain scenarios of life such as jobless or sudden death of the earning family members.
Like I said before, You’ll have to pay the mortgage insurance with anything less than the 20% down, but don’t let that hold you back
The extra $100 (or whatever it is, I can’t remember) is much less than the money you’re spending on rent that you’ll never see again. Paying rent is useless. Rents in Toronto and GTA are especially crazy high and it eats up almost 50% of your pay. So why not invest in the property and pay a little more instead of waiting to buy one. It’s well worth the decision. Think it over.
Also, another important point to mention is, by the time you save up that 20% for your down payment, home prices will have risen and you won’t have 20% anymore.
Once you achieve 20% equity you no longer need to pay mortgage insurance.
What a lot of people do is smartly do 5 or 10% down payment, pay a little extra per month for the mortgage, and after you’ve saved up more money over a few more years, you can make lump sum payments towards your mortgage to get it to 15% then eventually 20% equity. Thus, you can avoid paying the CMHC Insurance costs.
Top 10 Things To Look For Before Making Your First Home Purchase
1) Heating Furnace – Make sure you check how old is it? Is it high efficiency? etc. You may need or want to replace it based on the inspection report.
2) Plumbing – What type of plumbing is it? This can impact home insurance rates and older pipes could fail and cause problems. Any signs of water damage around pipes, under sinks etc. So please be extremely careful with the plumbing related issues. Never ignore them before buying the home.
3) Shingles – The first question you can ask is, are the Shingles brand new or super old? If they are very old it could mean the previous homeowners didn’t take care of the house properly. Also, there could be water damage on the roof.
4.) If you are looking at buying the townhouse or semi-detached, water damage in the basement is likely for older homes and it’s likely means water gets in. So make sure you check that in the home inspection report.
5) Gas bills – You can probably call your local hydro or gas utility and they can give you details on the gas bills for the property you are looking to purchase. Some home sellers may also be willing to provide it if they are courteous and nice. High gas bills could mean bad or old electric appliances, furnace or improper insulation.
6.) Electrical panel – Amps are important especially if you are looking to maybe add a hot tub etc. 100 amps are quite normal for most places. So do look out for that.
7) Wiring – Make sure the wiring is made of copper or aluminum? If you can see the wires in the basement or going into the panel it will tell you. Aluminum wiring is not ideal but not a deal-breaker. Often times there are some extra steps though as most fixtures etc use copper connections.
8.) Windows – Make sure that the windows are not made of some cheap plastic and close properly.
9) Home Ownership – If you are buying the home which had multiple previous owners, make sure to inform that to the home inspector. It gets really hard to make sure everything is good when the home is already owned by a couple of owners in the past. Be double-sure to get as much right before closing the deal.
10) Gardening yard and Location of the home – You’ll always want the water to run away from the house as much as possible. If the surrounding yard is higher than the base of the house then the water is going to run towards your house and go down to your foundation which is really bad and can get expensive to fix later. So make sure the water is off your house.
Bonus: Old Appliances – Old houses often have old appliances lying in the basement and sometimes they are too big to take out and can cost your money after some years. If you see these and you know you don’t want them, make sure you put that in the offer that you want them gone.
Before you close the deal, make sure you have the house thoroughly inspected by private home inspectors which can cost around $500 in Toronto. Trust me when I say this, its so much more worth it. Don’t think of saving a penny here. After all, you are spending hundreds of thousands of dollars on buying the home in the first place.
Also, make sure you follow the legal procedures and paperwork in the right way. Do not rush here or skip any steps for later.
Make sure everything is right in the first place. Also, have a good rapport with the home sellers, you never know when you might have to call them back. Makes sure to ask them their plans after selling the home. In case they want to leave the country and go back to their homeland, make sure you can still contact them or you’ll have no means if something goes wrong.
When you’re buying a home spending hundreds of dollars you’ve got to make sure to get as many things right.
There might be small things here and there which you might not notice, but overall spend quality time, engage home inspectors and get things right before closing the deal and making the payment.
After all, it’s your money and you’ve earned it. Don’t be at the mercy of others instead take control of your things and decide.
We’ve also looked at the practical scenarios of 5% down or <20% or 20% down payment and how you should approach it.
The final choice is yours, make sure you decide and plan things out the way you feel comfortable. After all, it’s one life we all have and we gotta live it our way.
Let me know your thoughts and comments below, do share this article on social media and help spread the word. Thanks for reading!
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.