This post was written by the former Estonian Credit Union, now Northern Birch Credit Union.
We asked Liisa Keevallik, our Retail Lending Manager, to answer some questions from a First Time Home Buyer.
1. I’m thinking of buying a home. What should my first steps be?
There are 3 main steps you want to consider, when you are thinking of purchasing your first home.
- Everyone’s first step should be to book an appointment with a lender to discuss and activate a pre-approval of a mortgage. This is not just for a first-time buyer but is an important step for a repeat buyer as well. Many things have changed in the real estate and mortgage world, so just because someone purchased a house 5 years ago, does not mean that they know what to expect with their next purchase.
- Do your own homework about the neighbourhoods you are considering moving to. Once you have your pre-approval in place, you want to interview a few Realtor’s to discuss their buying strategies, their knowledge about the current market and also their knowledge about the different parts of the city that you have been considering. If they don’t know what is happening in specific pockets of Toronto for example, then how do you know you’ll be happy there in the long run? How do they know the value of the house, based on the schools nearby or the night life nearby? Those are factors that do make a difference on the price of a house…and then some. Knowing that the Realtor is finding you your first home, means you have to tell them what is most important to you. Be honest about whether something is just a “want”, rather than a “need”. If you really don’t want to live on a specific street, don’t get pushed into a house on the wrong street.
- The third thing you should do is consult a few lawyers to see what their fees would be if they represented you with the purchase. A Real Estate Insured Solicitor will be required and you want to double check what you’ll be paying. Ask for him or her to quote THEIR fee for a purchase and a mortgage. Disbursements are costs which the Solicitor needs to pay to other companies, but these do not change from Solicitor to Solicitor. You want to compare the fee that you’ll be charged. You also want to double check that the Solicitor will be available to help you with the purchase, just in case if he or she have already booked holidays for around the time you want to buy a property.
2. What is a pre-approved mortgage?
A pre-approved mortgage is the process of applying for a mortgage so that you are ready to look and then buy a property. The pre-approval will provide you with an amount for what you would qualify for as a mortgage and also give you a guaranteed mortgage interest rate for 120 days so that you can shop the market within your budget. The pre-approval will remove a lot of stress and will allow for you to concentrate on the process of finding a suitable home. Knowing how much you qualify for with a mortgage will perhaps also save you time by not looking at homes out of your price range.
3. How much money do I need for a down payment?
The minimum amount you will need to have for a down payment is 5% on a property valued at up to $500,000.00. If the property you are looking at is valued at more than $500,000.00 then you will need 10% for the amount of over $500k. For example, if you are purchasing a condo for $575,000.00 you need to have non-borrowed funds of $25,000.00 for the first $500k, then 10% for the remaining $75k. So, a total of $32,500.00 will be your “down payment”.
However, you also need to have funds available on top of the down payment, to pay for your “closing costs”. Closing costs can consist of legal fees, property inspections and Title Insurance Land Transfer Taxes. There are other costs to consider as well, for example moving costs, booking an elevator, etc. All of these would be covered during your pre-approval process with ECU.
The higher your down payment is, the less closing costs you will pay.
4. What is mortgage insurance?
There are 2 different meanings for the words “mortgage insurance”.
- Mortgage “default” Insurance is what a borrower pays if his or her down payment is less than 20% of the purchase or appraised value of the property. This default insurance categorizes the mortgage as a “High Ratio” Mortgage. The basic meaning is that you need to take a mortgage for more than 80% of the value of the property. The default insurance is calculated on the total of the mortgage you request and is paid to the government or insuring company. Should your mortgage go into default (meaning you walk away from making the mortgage payments) the credit union will need to sell your property and any shortfall of paying off the mortgage is then paid by the government or insuring company.
- Mortgage Insurance can also mean that you are opting to purchase life, critical illness, disability insurance for the mortgage, should you pass away, get diagnosed with a critical illness (stroke, cancer or heart attack) or become disabled. This insurance will either make the mortgage payments for you while you are being treated for the illness, OR it will pay off the balance of the mortgage.
5. What other costs should I be prepared for?
Costs when moving into your first home will depend on what city you are moving into and also what type of property you are moving into. If you move into a Toronto property, you will have Land Transfer Tax to pay to the province of Ontario AND you will also pay Land Transfer Tax to the city of Toronto. (Most cities have not been charging LTT, but Toronto does).
If you purchase a condominium in a high-rise, you may need to pay something to the condominium to book the elevator for your moving day. You will need to set up certain utility accounts (hydro, Enbridge (gas), water etc) so double check with them if they have any fees to move your account from a rental unit to an owned property or if they require a security deposit of any sort. If your mortgage is considered a high-ratio insured mortgage (less than 20% down) then the default insurance may be added to the mortgage amount you need. The PST however on this insurance, is payable by you on the purchase (closing) date.
ALL lenders will require Title Insurance for the mortgage you get. The Title Insurance protects the lender for any issues that may be wrong with your property or the ownership of it. The cost of Title Insurance is based on the amount of your mortgage. The lower your mortgage is, the lower the Title Insurance premium will be. The Title Insurance is set up with your Solicitor. Many Solicitors also ask if you wish to purchase Title Insurance for yourself. There are many benefits to having Title Insurance, this is something your Solicitor will also be able to explain. As I mentioned, costs will vary based on the type of property you purchase and also the city or township you purchase in. A good estimation of funds to set aside for “closing costs” would be between 1.5% and 2.5% of your home purchase price.
6. What’s the difference between a closed mortgage and an open mortgage?
A closed mortgage refers to the extra payments you are allowed to make to a mortgage. A closed mortgage interest rate, will be lower than an open mortgage interest rate, because there is a restriction of how much you can “pre-pay” to the principal during the term of the mortgage that you choose.
ECU allows borrowers to pre-pay up to 15% each calendar year, of the initial amount that you borrowed from us. This optional payment is on top of your regular payments that you are required to make. If you would pay more than the 15%, then you will be charged a penalty.
An open mortgage, allows you to pre-pay as much as you wish of the mortgage, without any penalty at all. This is an option often chosen by people who are getting ready to sell their property in the next few months, OR who are expecting to come into a large amount of money in the next few months. With an open or closed mortgage, even if you do pre-pay a portion of your mortgage, you will still be required to make your regular payments.
Thinking of purchasing a home? Check out ECU’s current First Time Borrower Special.
Ready to shop? Get a pre-approval today.
Have your own questions? Comment below.