My 2020 Goal is to Purchase Toronto Real Estate. But, How Much Can I Afford?
So, you’re thinking about buying Toronto real estate in 2020. Exciting! Now, if it’s your first condo or house, you’re likely to ask yourself, “how much can I afford?” And, if one of your New Year’s resolutions is buying Toronto Real Estate, you should use your December wisely. Get cracking on that answer today!
5 Questions You’ll Want to Know the Answers to When Buying Toronto Real Estate
Unless you have all the necessary funds to purchase the property (very rare, so don’t worry), you will require a mortgage from a lender. In today’s home buying environment, a mortgage pre-approval is not only essential, but it is also incredibly easy to obtain. In fact, it can be done over the phone or in-person. A mortgage pre-approval lets you know the maximum mortgage amount the lender is prepared to lend you. It also illustrates to a seller and the seller’s agent that you are a serious and capable buyer!
What other questions might you have? Take a look at the top need-to-know’s when buying Toronto Real Estate…
1. Do I go to my bank or to a mortgage broker for my pre-approval?
Honestly? See both. It’s always good to know what your bank can do for you. However, we strongly recommend that you interview a mortgage broker. They have access to many lenders and can obtain quotes from the various lenders who are best positioned to meet your requirements. If you don’t know where to find a reputable mortgage broker, reach out to Fox Marin and we can point you in the right direction! Mortgage brokers understand what qualifications each lender is looking for and can structure your application accordingly. They also know where the bargains are and that residential mortgages not just about the interest rate. And, mortgage brokers are usually compensated by the lenders they represent, in case you were worried about fees!
2. What is the difference between “pre-qualified” and “pre-approved”?
Mortgage pre-qualification is generally a quick and simple process that you can do online or over the telephone. You will provide the mortgage lender a quick snapshot of your financial information, including your salary, debt and assets. Based on this information, the mortgage advisor will provide an estimated assessment as to how much they’d be willing to lend you toward a home purchase. However, a pre-qualification is not a guaranteed mortgage. It’s just the first step in a much more onerous process!
A mortgage pre-approval formalizes your buying power. The mortgage lender will validate your credit score and financial history. You will be required to provide various documents with your application, including your credit score, T4 slips, income tax returns, etc. The lender carefully analyzes your financial situation by applying their established standards for underwriting.
If you’re pre-approved, the lender is making an actual commitment (subject to conditions, such as a property’s appraisal) to give you a mortgage. Note, a pre-approval is still not necessarily a guarantee that you will receive a specific interest rate or length of the term. You will receive a letter or certificate from the lender outlining their findings when it comes to amortization period, payment schedule, mortgage term, and interest rate. Some lenders guarantee the rate they have offered you for up to 90 days. Make sense so far?
3. What do I need to know about making a down payment?
A mortgage down payment is the amount of money you pay upfront when purchasing a home. You must determine exactly how much money you have available to invest in your down payment and closing costs. In layman’s terms? This is the total amount of cash you have available at hand!
But wait, what is the minimum down payment required? This all depends on the purchase price of your new home or condo! Here’s the breakdown – if the purchase price is:
- Less than $500,000: the minimum down payment is 5%
- Between $500,000 and $999,999: the minimum down payment is 5% of the first $500,000 and 10% of any amount over $500,000
- $1,000,000 or more: the minimum down payment is 20%
In the event your purchase price exceeds 1.5MM, some lenders will enact a “sliding scale” requirement where they will require a larger down payment. For amounts above 1.5MM, the requirement might be 20% of the first 1.50MM and 35% of any amount above that.
Additionally, mortgage default insurance (CMHC insurance) protects the mortgage lender in the event the borrower defaults on their payments. It is a requirement on all mortgages with down payments of less than 20%, which are known as high-ratio mortgages. A conventional mortgage is one where the purchaser is putting down a down payment that is 20% or higher. Still following? So, the size of your down payment is one big factor in determining what you can afford.
One other important factor to take into account is the amount of debt you currently have. The lower your debt-to-income ratio, the more money you’ll likely have to put towards your mortgage. In addition, your debt level will also help to determine how large a mortgage you will qualify for. Some lenders will require you to pay off a line of credit or a credit card balance before permitting a loan. So, make sure to get all of these details upfront so there are no surprises!
4. What is a mortgage term?
When you’ve qualified for a mortgage, after considering your down payment and any outstanding debt, it’s time to make decisions about your mortgage term and amortization period. This will influence the amount of money you can borrow and will determine your monthly payments.
A mortgage term is the number of years or months over which you pay at a specific interest rate. Terms can range from six months to 30 years. When the term is up, the remaining amount is payable in full unless you arrange new financing for another term. You can discuss your interest rate, mortgage terms and amortization period with a qualified mortgage broker or specialist. You’ll want to ensure you understand what your monthly payments will look like.
Lastly, there are a few additional expenses that may impact how much money you have to put towards your mortgage each month. You should factor in expenses like property taxes, homeowner’s insurance and even things like home maintenance before making your final decision about “what can I afford?” These costs are often overlooked, but should be considered prior to settling on your plan for 2020 and beyond!
5. Are there lifestyle considerations I should think of?
While you may qualify for a certain mortgage amount, you should also think about how it will impact your current living arrangements and other things that are important to you. Will you be able to maintain your current lifestyle with the mortgage payments you’re considering? Are there changes to your current spending that you can make to be able to afford that new home or condo?
Small minor changes to your lifestyle are likely doable. However, major changes really need to be considered. Look hard at your current lifestyle. How much do you spend on going out to dinner, movies, travel, etc.? You may decide to eat at home more often or watch movies at home instead of going out. Whatever your modifications may be, you need to assess how drastic this change will be for you! Will you be satisfied with the changes you’ve made? A dramatic change in your day-to-day living circumstances may not be realistic for you. You still need to live your life, right? So, perhaps, you consider lower budget options or save up for a larger down payment to lower your monthly mortgage payments.
The Future
It is important to think ahead, especially if you’re considering buying Toronto real estate. Where will you be in a few years? Will you have kids, a new job, be self-employed, etc.? How will this affect your future? The impact of family and employment changes will affect cash flow and your ability to meet your monthly financial obligations. For example, the birth of a child can mean less income due to maternity leave, on top of an increase in baby expenses. Look at your employment situation, will you be getting a salary increase soon or will you be resigning to start up your dream company? Is your spouse or partner going back to work? So, you may want to look at stretching yourself now, for the added flexibility later to get into that home or condo you really want to attain in 2020!
Start Planning Now
There are a lot of balls to juggle to understand, “what can I afford?” We want to see you through to the finish line whether it’s this month or in two years’ time! Here at Fox Marin Associates, we will take the time to understand your 2020 real estate goals and beyond. We follow a thoughtful approach that is based on five key principles:
- Financial Planning is Paramount
- Open, Honest and Frequent Communication
- Our Network is Your Network.
- Our “All-In” Attitude Means We Play to Win
- We’re in it for the Long Run
Take the first step to buying 2020 Property! You can complete our buyer intake in just five minutes (give or take). But of course, the more details, the better. Let’s get you started with our Buyer’s Questionnaire and your first action toward your New Year’s resolution:
Buyer Intake Questionnaire
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This article is written by Kori Marin, Managing Partner and Broker at Fox Marin Associates. With a passion for Scandinavian design and all-things-Toronto, Kori brings her own brand of charismatic energy, creative integrity, and expertise to her work.
