22 Nov I Want To Buy A House – Where Do I Start?
In this post we will go over:
- Where do I start
- What are the steps
- What can I expect when house hunting
- The costs (taxes, closing costs etc)
- A quick financial example
I have experience. Please just send me listings to browse through.
If this isn’t your first time buying/selling a house then you can skip the article and get in contact with us. We’d be happy to send you listings for you to look through or answer any questions you may have. For an instant response, try the live chat at the bottom of the screen. Otherwise send us an email at [email protected]. Lastly you can call us during our business hours at 905-331-4747.
It always starts with money.
Knowing how much you can afford is the first step towards buying a house. Wondering how much you can afford? The general rule of thumb is 3 times your pre-tax income. Unfortunately in Toronto that would mean nobody would be able to afford a house. This number has now been stretched from 4-6 times your pre-tax income. It all depends who you speak to and how conservative your bank is.
A second way to see how much you can afford is to look at something called the Debt Service Ratio. It is one of the ways lenders assess affordability. Ultimately the DSR is a percentage comparing the costs to your income. Your costs should not exceed 32% of your income to be approved.
Example: $1,200/M mortgage payment + $150/M property tax, + $100 heating costs = $1,450. Let’s say you have a $65,000 a year income which comes to $5,400/M. Your Debt Service Ratio would be $1,450 divided by $5,400 = 26%. In this example, you would be under the 32% threshold and would be well suited for the loan. Of course there are many other factors that lenders consider (credit, student loans, car loans etc). This is just a quick and easy way to work backwards and get an idea of what you can afford before you see your mortgage broker.
If you haven’t started yet, start saving for a down payment. Most people will need a mortgage when purchasing their home. Your bank will want you to put down a certain percentage of the purchase price of your home. In Canada this is anywhere from 5-20%. It is important to note that you will pay a small insurance premium that will be baked into your mortgage payment when you put down any percentage smaller than 20%.
The first step is always to get pre-approved for a mortgage. Go to your local branch to speak with a mortgage professional. They will be able to assess your financial situation and get you pre-approved for a mortgage. You’ll feel more comfortable looking at homes once you know what you can afford.
Here is what you can expect your home buying journey to look like:
- Get pre-approved for a mortgage
- Look at houses with your realtor
- Put in an offer on a house or compete in a few bidding wars
- Offers are usually signed the same day or within 24 hours
- Once the your offer is accepted, you find a real estate lawyer and he takes over
- Get started on the paperwork (Property insurance, Mortgage)
- You meet with your Lawyer a few days before closing to finish up the paperwork
- Closing days (the day you get possession) are usually 60/90/120 days from when you initial sign the paperwork to purchase the property.
Viewing houses is the easy part.
Once you are all ready to go then we can start sending you listings of available houses. We can also set you up on a system where you can do your own searches. If there is something that peaks your interest, just let us know and we can go take a look. Usually a few hours notice (and sometimes 24 hours) is needed when going to see a house. Appointments are booked for an hour but it only takes about 15-20 minutes to view a house. If you’ve found your dream house then it is time to put in an offer. There are 2 ways this is done.
The sellers hold back the offers (or more commonly known as a bidding war): Sellers will give everybody a week or so to view the property and tell any interested party to bring their offers at the same time at a specified date and time. With multiple offers, prices usually rise and things get pretty heated on offer night. You might be told you are very close to another offer and that everybody is getting another chance to up their offer. It is no doubt stressful. The average person loses a few bidding wars before purchasing their home.
Offers anytime: In this scenario, you may submit an offer at any time and set the irrevocable date/time. Much less stressful than a bidding war. It does not necessarily mean you will not be in competition if others are interested and also submit an offer.
You might have heard lately (Nov 2016 as of writing this) that the Toronto Real Estate Market is very hot at the moment. Prices are going through the roof and bidding wars usually get out of hand. There is a lot of truth to these statements. Bidding wars are tough. You may be up against a couple that has lost the last few times around and are finally convinced this is the house for them. You might be shocked that offers come in at inexplicable prices once the night is over. No amount of analysis can account for the emotions on offer night. It is always best to take the emotion out of it, have a plan and stick to it.
What kind of taxes/fees will I have to pay if i purchase a house in Toronto?
Land transfer taxes: Payable on closing day (the day you take possession of your home). This is a tax every buyer has to pay when purchasing a home in Toronto (you do not pay this tax once you sell the property). You only pay it once and it will be done with your lawyer along with all other paperwork. Click here for a Toronto land transfer tax calculator. It is important to note that the city of Toronto imposes an extra tax on top of the Ontario land transfer tax. You will see a breakdown of both in the calculator. It is quite possible that you will be purchasing a house outside of the official “Toronto” boundary and therefore only paying the Ontario land transfer tax. Areas like Markham, Brampton, Mississauga and Richmond Hill are usually called “Toronto” when speaking in a general sense to someone not too familiar with the area. Officially they are not considered Toronto for the purpose of land transfer taxes. Here is a map of the “official Toronto” where you would pay the extra land transfer fee:
Lawyer Fees: Lawyer fees will usually run you anywhere from $1000 – $2000. This usually includes the title insurance that you must get when purchasing your home (usually around $300-$400).
Adjustments Upon Closing: It is possible that the seller might have prepaid for certain expenses that extend beyond the closing day. To make it fair, the lawyers will break down the daily costs and adjust the final bill accordingly. For example, the seller has prepaid for part of the property taxes. The lawyers will adjust it so that you pay for your portion of the property tax. There usually isn’t too much in terms of adjustment. The only real big one is the property tax. Even then it should not break the bank.
Property taxes: Anybody who owns a home will pay property tax each year. This tax helps pay for education, maintenance and other services. The payment is broken down into 4 payments throughout the year. Here is a Toronto property tax calculator. It is important to note that property tax is not calculated on your purchase price, but rather the assessed value of your home. It is quite confusing. Each 4 years the city re-assesses the value of your and all other homes in Ontario. This number usually comes in at a few hundred thousand under the actual market value. It varies a lot. 400k homes might get assessed at 200k, 2 million dollar homes might get assessed at 800k. You will be able to see the current taxes for the year on the listings that we set out. Just be aware of the assessed value when using the calculator.
Review: What will you pay and when
A deposit of 5% of purchase price of the property when you sign the purchase documents. This will be held in trust by the listing brokerage and applied to the final purchase balance once you take possession of the house. Upon signing the purchase and sale agreement, you have 24 hours to provide a certified cheque / bank draft or wire the deposit.
A downpayment of 35% payable on closing day (the day you get possession of the house). Your 5% deposit will be applied against this amount. If paying cash (buying without a mortgage) you will pay the full remaining balance.
Land transfer Tax payable on closing day (the day you get possession of the house). See above for an explanation of land transfer tax.
Lawyer fees, adjustments, & small fees. These will be paid on closing day as well. Lawyer fees usually come in around $1000-1500 and adjustments are a few thousand dollars if property taxes have already been prepaid by the seller. They will be broken down line by line by your lawyer. These should not be deal breakers when purchasing a house in Toronto. It is more important to be aware of deposit, downpayment and land transfer taxes.
Property Taxes are paid yearly through 4 installments. The city of Toronto will send out bills accordingly
A financial Example
You purchase a property for $450,000 on the outskirts of Toronto. You buy it on Jan 1 and it closes on March 1. You put down 20% and get a 2.5% 25 year mortgage.
- When you sign the paperwork on Jan 1: You must give a deposit of around 5% ($22,000)
- Prior to March 1 you get your ducks in a row, contacting a lawyer as well as your mortgage professional.
- On March 1 (or a few days prior), you will meet your lawyer and pay
- $5,475 in land transfer taxes
- $1,500 in lawyer fees (might include title insurance)
- Any adjustments (vary from a few hundred to a few thousand at most)
- The balance of the down payment ( 20% x $450,000 – $22,000) $68,000
- Your bank will have been in contact with your lawyer and will have forwarded the loan payment.
- Your monthly mortgage payment will be roughly $1,612
- Throughout the year you will pay property taxes of around $2,500 – $4,000) depending on the municipality you live in. These payments are usually broken down into 2 installments.
***It is important to note that if the property would have been in what is officially called “Toronto” by the city, your land transfer taxes would have been $10,200 ($5,475 for Ontario land transfer taxes and $4,725 for Toronto land transfer taxes***
***It is also important to note that if you would have paid anything less than 20% as a down payment, you would be forced to get mortgage insurance. This is a 1.8% – 3.6% fee of your total mortgage that will be baked into your mortgage payment throughout the 25 year period. You will however have to pay the Provincial Sales Tax of this amount at closing (8% in Ontario). See the chart below for some numbers***