Toronto is one of the best places to invest in property in Canada with real estate prices rapidly increasing over the years. Unfortunately, it also means that the housing market in the city is expensive with average house prices at approximately $1.1 million. This figure represents nearly a 22% increase compared to figures in November 2020. If you’re planning to buy your first home in Toronto, here are factors that you should consider before buying your first property in Toronto.
Pre-Approved Mortgage
Getting pre-approved is important before you start looking at homes so that you will know how much you can borrow. Hence, you must evaluate your finances to see if you can pay for your potential new home based on your income. To do this, you need to be gainfully employed with a regular pay cheque so that you can afford the monthly mortgage, property taxes and utilities payments. In addition to your income, the lender will also look at your debts and liabilities, credit history, and savings. Once you have a pre-approved mortgage, you can work with a realtor to help you in the home buying process including making an offer and providing the deposit.
According to a Financial Post report, you will need a household income of $160,000 to afford a house priced at $873,100. For example, if the purchase price of a house is less than $500,000, (which, quite frankly, are no longer to be found in Toronto) the minimum down payment you will need is 5% of the total cost. For property prices between $500,000 and $999,999, you must provide a down payment of 5% of the first half million and 10% of the remaining amount over $500,0000. If the selling price is over a million, you will be asked to put a minimum down payment of 20%. Bear in mind, that your down payment will shape the size of your monthly mortgage payments. It will also affect the amount of Canada Mortgage and Housing Corporation (CMHC) insurance that you will be required to pay.
Sources of Down Payment
There are several sources of funds to cover your down payment. Traditional sources include savings that you have squirreled away, personal property or stocks, or gifts from family. In addition, the government of Canada has also first-time home buyer programs to help people purchase their first home. The Home Buyer’s Amount (HBA) tax credit assists future homeowners with the costs of acquiring a home such as legal fees and taxes.
Another form of assistance is the Home Buyers’ Plan authorizing first-time home buyers to withdraw up to $35,000 or $70,000 for a couple from their registered retirement savings plan (RRSP). The money must be paid back to your RRSP each year over a 15 year period; otherwise, you will be required to pay a penalty. There’s also the First-Time Home Buyer Incentive that you can apply for where the Government of Canada provides 5% of the purchase price of an existing home in exchange for a shared-equity mortgage. To illustrate, you will receive $30,000 for a house that is valued at $600,000 – again, this is an unrealistic home price for most Toronto real estate! You cannot earn more than $150,000 annually in order to qualify for the incentive. The incentive must be paid back after 25 years or when the property is sold, whichever comes first. The homebuyer will have to repay the incentive based on the property’s fair market value at the time of repayment. If a homebuyer received a 5% incentive, they would repay 5% of the home’s value at repayment.
Purchasing real estate in Toronto for the first time is quite challenging due to the high demand for real estate and rapidly increasing prices. However, if you understand your finances, accumulate a healthy down payment, and make use of government incentives, it is possible to find and buy your own home in Toronto.
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