For many, a home purchase can be one of the biggest decisions of your life. It is also a process that can be met with both stress and uncertainty. This is perfectly normal! Having a strong understanding of the buying process is important in navigating this uncertainty and remaining positive throughout. This guide is meant to alleviate these concerns while outlining the 10 key steps to buying a house in Ontario. It includes both important factors to consider and costs to think about when working towards your purchase.
Before diving into the process and committing to the home-buying journey, it’s important to really consider if buying is the right course of action in your situation. This can include:
- Comparing the difference in cost between renting and owning
- Understanding the emotional rollercoaster buying a home can be, and
- Saving for a downpayment and budgeting for costs along the process
Step 1- Saving for a Down Payment
Being in a strong enough financial position to put money aside for a down payment is the first and most important step to being on the road to home ownership. In Ontario, you will need to have at least a 5% down payment for purchase prices under $500,000. For houses between $500,000 and $1,000,000, your minimum down payment is 5% on the first 500k, and 10% on the remaining amount. Finally, for houses over $1,000,000, your minimum down payment is 20%. When calculating how much of a down payment you may need, our down payment calculator is a helpful tool.
|Purchase Price||Minimum Down Payment (% of Purchase Price)|
|$500,000 – $999,999||5% of the first $500,000, then 10% of remainder|
|$1 Million and up||20%|
Having a large down payment of at least 20% in any circumstance will allow you to have added flexibility on your home-buying journey. It will also save you thousands of dollars on both interest payments and from not needing mortgage insurance. The latter can especially add to your overall cost, with the following CMHC premiums applying in most situations:
|Down Payment (% of Purchase Price)||5-9.99%||10-14.99%||15-19.99%|
|CMHC Insurance (% of Mortgage Amount)||4.00%||3.10%||2.80%|
With Toronto’s average sale price increasing to over $1,000,000 in 2021, and with prices rising throughout Ontario in tandem, starting early-on in building a down payment can be crucial. Luckily, if your a first-time home buyer, the federal and provincial governments have programs in place to help, including:
- The Home Buyers Plan, allowing you to borrow up to $35,000 from your Registered Retirement Savings Plan (RRSP) for a down payment,
- The First Time Home Buyer Incentive, with the Government of Canada offering up to $25,000 in shared home equity, and
- Provincial and Municipal Land Transfer Tax rebates , covering up to $4,000 in Ontario, along with Municipal rebates for those buying in Toronto for up to $4,475.
Step 2. Building Your Credit Score & Having Stable Income
With your credit score being an important tool that lenders use in evaluating your creditworthiness, building it up is a crucial part of obtaining a mortgage for your home purchase. Ideally, in order to meet the credit score requirements for obtaining an insured mortgage loan, your credit score needs to be at least 600 . Besides needing a credit score above 600 for an insured mortgage, having a higher credit score can also affect your mortgage interest rate, lending options, and the mortgage lenders who are willing to provide you a loan.
Building your credit score starts before you even consider buying a home, through taking proactive steps to improve your credit, including:
- Avoiding late payments,
- Keeping your credit utilization rate, (total debt outstanding divided by your total credit limit across all accounts) low,
- Maintaining a good credit history, and
- Limiting credit inquiries on your account
Along with a good credit score, having a stable income source will make obtaining a mortgage much easier. Owning your own home also means that you will be responsible for expenses that come with it, which can include costly maintenance and repairs, yearly property taxes , and home insurance premiums. Being in a position where your income allows you to face any unexpected issues as they come about puts you in a better position to manage them. If your income is less steady because of being self-employed or a contract worker, it’s important to plan in advance by setting some money aside as an emergency fund. Also, consider applying for home insurance online.
Step 3. Checking your Affordability
In tandem with steps 1 & 2, your down payment amount, along with your credit score and income all go into what you can afford in a home. Housing affordability depends on a number of factors, including:
- How large your down payment is,
- Your Total Debt Service (TDS) Ratio, which is your annual housing related expenses + debt expenses, divided by your gross income,
- Your Gross Debt Service (GDS) Ratio, which is your annual housing related expenses divided by your gross income, and
- Current monthly expenses not exceeding after-tax income
To find out how much you can afford, the WOWA affordability calculator simplifies the process. Understanding not just what you can afford, but how much you are comfortable spending is crucial in finding a home that you can feel good about. Finally, when deciding on how much to spend, putting together a budget can help you to stay on track and to keep up with your monthly housing expenses, for when you do move into your home.
Step 4. Determining Where to Buy
Once you determine how much you can afford and what you are comfortable spending on a home comes deciding where to buy. Factors such as commute time, public transit, neighbourhood amenities, safety and school rankings tend to be top of mind for many new homebuyers.
Being in a catchment area for a good school is a factor that many young families or prospective parents look towards when making their buying decisions. Although very important, it’s worth noting the potential high costs of living near some high ranking schools.
When it comes to commuting, choosing a location will mean being comfortable in your daily commute. By picking a neighbourhood outside the city to look, you may get more space for your budget, however it may add-on hours to your daily commute. As well, being further away from the city could also make public transportation less feasible, meaning the neighbourhood you choose is something to think long and hard about.
Urban homes might be smaller than suburban and rural homes, but they are often more expensive. A quick way to compare locations and to find out where you can get the most space for the best value would be to look at the price per square foot.
Step 5. Estimating the Closing Costs
Generally, a good estimate of how much to budget for closing costs when buying a house in Ontario tends to be between 3-5% of the purchase price. The two largest components of closing costs include Land Transfer Tax, and Lawyer & Legal Fees. To estimate the cost of Land Transfer Tax on a property, see WOWA’s Land Transfer Tax Calculator .
|Type||What is it?||Estimated Cost?|
|Land Transfer Tax||Provincial & sometimes Municipal tax on the transfer of property.||Calculated using a marginal tax bracket system based on your purchase price.|
|Lawyer & Legal Fees||Lawyer acts on your behalf in the purchase and mortgaging of the property.||Varies depending on the work; can cost between $500 & $1,500.|
Other smaller components that will make up your closing cost can also include:
Overall, being aware of what your closing costs may be in advance can reduce any surprises and help you stay on budget.
Step 6. Get a Mortgage Pre-approval & Look for the Best Rate
Getting a mortgage pre-approval before looking for a home provides the stability of locking in an interest rate for up to 120 days, while providing an estimate on how much of a mortgage you qualify for. A pre-approval acts as a written contract between you and your lender. However, getting pre-approved also does not mean you cannot shop around for rates. More-so, a pre-approval helps you to plan in advance with information on what your mortgage may look like, including how much you can afford to spend, the interest rate available to you and what your monthly payment could look like.
When it does come to finding a mortgage lender, searching out the lowest rate can meaningfully save you on monthly interest costs .
For example, you purchase a house for $600,000. You paid $120,000 down (20%), meaning you did not need mortgage insurance. You took out a 5-year mortgage for $480,000 with a 25 year amortization, at a 3.2% interest rate after getting pre-approved. This means that you are paying $71,110 in interest over the 5 year period.
However, interest rates fall between the time you got pre-approved and the time you needed the mortgage. There were similar termed mortgage rates at 2.6%. Had you looked for and gone with a similar rate, you would have paid $57,530 in interest instead. By not shopping around for a better rate, you paid an extra $13,580! This shows the importance of always looking for the best rate.
Step 7. Find a Good Real Estate Agent
Connecting with a real estate agent that fits your needs and has a strong understanding of the market you’re looking-in is crucial. Especially for first-time buyers, having an experienced agent can provide much needed clarity in a brand new situation. When looking for an agent, WOWA’s real estate agent matcher will make the search process much easier, connecting you with top rated agent profiles who you will be able to get in touch with and determine if they are the right fit. Since finding a home can be one of the most important purchases of your life, it’s highly recommended to assess and get in touch with multiple agents, to help find the one best for you.