Getting a mortgage is one of the most significant financial decisions you’ll make in your life. For many Ontarians, buying a home is a dream come true, but navigating the mortgage process can be overwhelming. This comprehensive guide will walk you through everything you need to know about getting a mortgage in Ontario, from the types of mortgages available to the costs associated with buying a home.
Types of Mortgages
When it comes to mortgages, there are several options to choose from. Here are the most common types of mortgages in Ontario:
- Conventional Mortgages: A conventional mortgage is a loan that does not exceed 80% of the property’s value. This means that you’ll need a down payment of at least 20%. Conventional mortgages are typically easier to qualify for and may have lower interest rates than high-ratio mortgages.
- High Ratio Mortgages: If your down payment is less than 20%, you’ll need a high ratio mortgage. These mortgages require mortgage default insurance, which protects the lender in case you default on your payments. The mortgage default insurance is provided by the Canada Mortgage and Housing Corporation (CMHC) or a private insurer such as Genworth Canada or Canada Guaranty.
- Open vs. Closed Mortgages: An open mortgage allows you to make extra payments or pay off your mortgage in full without penalty. This flexibility comes at a cost, as open mortgages typically have higher interest rates than closed mortgages. A closed mortgage, on the other hand, typically offers lower interest rates but comes with restrictions on prepayments. If you want to pay off your closed mortgage early, you may have to pay a prepayment penalty.
- Fixed vs. Variable Rate Mortgages: With a fixed-rate mortgage, your interest rate remains the same throughout the term of your mortgage, which can range from 6 months to 10 years. This provides stability and predictability in your mortgage payments. A variable-rate mortgage, however, fluctuates with the prime rate set by your lender. Variable-rate mortgages typically have lower interest rates than fixed-rate mortgages, but your payments can increase or decrease as the prime rate changes.
| Mortgage Type | Description |
|---|---|
| Conventional | Down payment of at least 20% |
| High Ratio | Down payment less than 20%, requires mortgage insurance |
| Open | Allows prepayments without penalty |
| Closed | Lower interest rates, restrictions on prepayments |
| Fixed Rate | Interest rate remains the same throughout the term |
| Variable Rate | Interest rate fluctuates with the prime rate |
Mortgage Lenders in Ontario
There are several types of mortgage lenders in Ontario, each with their own advantages and disadvantages.
- Banks and Credit Unions: These are the most common mortgage lenders in Ontario. They offer competitive interest rates and a wide range of mortgage products. Some of the major banks in Ontario include RBC, TD Canada Trust, Scotiabank, BMO, and CIBC. Credit unions, such as Meridian Credit Union and FirstOntario Credit Union, are also popular mortgage lenders in the province.
- Mortgage Brokers: Mortgage brokers work with multiple lenders to find the best mortgage product for your needs. They can often access exclusive deals and discounts that may not be available through banks. Some reputable mortgage brokers in Ontario include True North Mortgage, Mortgage Architects, and Mortgage Wellness.
- Private Lenders: Private lenders are individuals or companies that offer mortgages to borrowers who may not qualify for a traditional mortgage. These loans often come with higher interest rates and fees. Private lenders may be a good option for self-employed individuals, those with poor credit, or those looking to purchase unique properties.
- Alternative Lenders: Alternative lenders, such as trust companies and mortgage investment corporations, offer mortgages to borrowers who may not meet the strict requirements of traditional lenders. These lenders may have more flexible qualification criteria but typically charge higher interest rates and fees. Examples of alternative lenders in Ontario include Home Trust Company, Equitable Bank, and MCAP.
Qualifying for a Mortgage
To qualify for a mortgage in Ontario, you’ll need to meet certain criteria. Here are the main factors that lenders consider:
- Income: Lenders will look at your income to determine whether you can afford your mortgage payments. You’ll need to provide proof of income, such as pay stubs, T4 slips, and tax returns. Lenders typically require a minimum gross income of around $40,000 to $50,000 per year, but this can vary depending on the lender and your other financial obligations.
- Credit Score: Your credit score is a measure of your financial health. A higher credit score indicates that you’re a low-risk borrower, which can help you qualify for a better interest rate. In Canada, credit scores range from 300 to 900, with a score of 660 or higher generally considered good. You can check your credit score for free through services like Borrowell or Credit Karma.
- Down Payment: The size of your down payment will determine the type of mortgage you qualify for. In Ontario, the minimum down payment is 5% for homes under $500,000. For homes between $500,000 and $999,999, the minimum down payment is 5% on the first $500,000 and 10% on the remaining amount. For homes over $1 million, the minimum down payment is 20%.
- Debt-to-Income Ratio: Your debt-to-income ratio is the amount of debt you have compared to your income. Lenders typically want to see a debt-to-income ratio of 36% or less for your gross debt service ratio (GDS), which includes your mortgage payments, property taxes, and heating costs. Your total debt service ratio (TDS), which includes all other debt payments, should be no more than 42%.
- Employment History: Lenders prefer borrowers with a stable employment history, typically at least two years with the same employer or in the same field. If you’re self-employed, you’ll need to provide additional documentation to prove your income, such as business financial statements and tax returns.
First-Time Home Buyers
If you’re a first-time home buyer in Ontario, there are several incentives and programs available to help you get into the housing market.
- Home Buyers’ Plan (HBP): The HBP allows you to withdraw up to $35,000 from your RRSP to use towards your down payment, tax-free. You’ll have 15 years to repay the amount you withdrew.
- First-Time Home Buyer Tax Credit: The First-Time Home Buyer Tax Credit is a non-refundable tax credit of up to $5,000 that can be claimed on your income tax return.
- Land Transfer Tax Rebates: First-time home buyers in Ontario may be eligible for a rebate on the land transfer tax. The maximum rebate is $4,000 in Toronto and $4,475 in Ontario.
- First-Time Home Buyer Incentive: The First-Time Home Buyer Incentive is a shared equity mortgage program offered by the Government of Canada. It provides 5% or 10% of the home’s purchase price to put towards your down payment, in exchange for an equity stake in the home.
Despite these incentives, first-time home buyers still face challenges when entering the housing market. These challenges include:
- Saving for a down payment
- Qualifying for a mortgage with limited credit history
- Finding an affordable home in a competitive market
- Understanding the home buying process
To overcome these challenges, first-time home buyers should work with a mortgage broker or financial advisor to understand their options and develop a plan for homeownership.
Self-Employed Buyers
If you’re self-employed, getting a mortgage can be more challenging. Lenders may require additional documentation to verify your income, such as:
- Business financial statements for the past 2-3 years
- Personal and business tax returns for the past 2-3 years
- Contracts, invoices, and other proof of income
- A letter from your accountant confirming your income
Self-employed buyers may also need to provide a larger down payment and have a higher credit score to qualify for a mortgage. Lenders typically require a minimum credit score of 680 for self-employed borrowers, compared to 620 for salaried employees.
To improve your chances of getting approved for a mortgage, self-employed buyers should:
- Keep meticulous financial records
- Minimize write-offs and deductions to show higher income
- Maintain a good credit score
- Have a larger down payment (at least 20%)
- Work with a mortgage broker who understands self-employment
Refinancing Your Mortgage
Refinancing your mortgage means replacing your current mortgage with a new one. There are several reasons why you may want to refinance, including:
- Lower Interest Rates: If interest rates have dropped since you got your mortgage, refinancing could help you save money on your monthly payments. Even a small reduction in your interest rate can save you thousands of dollars over the life of your mortgage.
- Debt Consolidation: Refinancing can allow you to consolidate high-interest debt, such as credit card balances, car loans, and personal loans, into your mortgage, which typically has a lower interest rate. This can simplify your payments and potentially save you money on interest charges.
- Home Renovations: Refinancing can provide you with funds to renovate your home, which can increase its value and improve your living space. Popular renovation projects include kitchen and bathroom remodels, additions, and energy-efficient upgrades.
- Access to Equity: If your home has increased in value since you purchased it, you may be able to access some of that equity through a refinance. This can provide you with cash for other purposes, such as investing or paying for education expenses.
The refinancing process is similar to getting a new mortgage. You’ll need to qualify based on your income, credit score, and equity in your home. There are also costs associated with refinancing, such as appraisal fees, legal fees, and potential penalties for breaking your existing mortgage term.
Before refinancing, it’s important to carefully consider the costs and benefits. You’ll want to ensure that the savings or additional funds you’ll receive outweigh the fees and potential increase in your mortgage payments.
Second Mortgages
A second mortgage is a loan that is secured against your home equity. It is subordinate to your primary mortgage, which means that if you default on your payments, your primary mortgage lender has first claim on your home.
Reasons to consider a second mortgage include:
- Consolidating high-interest debt
- Financing home renovations
- Paying for unexpected expenses
- Investing in a business or other venture
Second mortgages can be a useful tool for accessing the equity in your home, but they also come with risks and drawbacks, such as:
- Higher interest rates than primary mortgages
- Putting your home at risk if you can’t make your payments
- Fees and closing costs
- Potential impact on your credit score
Before taking out a second mortgage, it’s important to carefully consider your financial situation and ability to make the additional payments. You’ll also want to shop around and compare rates and terms from different lenders.
Private Lenders and Alternative Lenders
If you don’t qualify for a mortgage from a traditional lender, you may want to consider a private or alternative lender. These lenders often have more flexible qualification criteria, but they also come with higher interest rates and fees.
Private lenders are typically individuals or companies that lend their own money. They may be more willing to work with borrowers who have poor credit, non-traditional income sources, or unique property types. However, private lenders often charge higher interest rates and fees, and their loans may have shorter terms or more stringent repayment requirements.
Alternative lenders, such as trust companies and mortgage investment corporations, offer mortgages to borrowers who may not meet the strict requirements of traditional lenders. They may have more flexible qualification criteria, but they also typically charge higher interest rates and fees.
Some examples of private and alternative lenders in Ontario include:
- Lending Ark (private lender)
- Mortgage Company of Canada (alternative lender)
- Fisgard Asset Management (private lender)
- Pillar Financial (alternative lender)
While private and alternative lenders can provide access to financing when traditional lenders won’t approve you, it’s important to carefully consider the costs and risks involved. These loans often come with higher interest rates, shorter terms, and stricter repayment requirements, which can make them more difficult to manage in the long run.
The Mortgage Application Process
The mortgage application process can be broken down into several steps:
- Pre-Approval: Before you start house hunting, it’s a good idea to get pre-approved for a mortgage. This will give you an idea of how much you can afford to spend on a home and can make your offer more attractive to sellers. To get pre-approved, you’ll need to provide your lender with information about your income, assets, and debts.
- Gathering Required Documents: To apply for a mortgage, you’ll need to provide several documents, including:
- Proof of income (pay stubs, T4 slips, tax returns)
- Proof of assets (bank statements, investment accounts)
- Identification (driver’s license, passport)
- Property information (purchase agreement, MLS listing)
- Employment verification (letter from employer, job contract)
- Credit report and credit score
- Submitting Your Application: Once you’ve gathered all the required documents, you can submit your mortgage application to your lender. This can typically be done online, in person, or through a mortgage broker.
- Mortgage Approval: If your application is approved, your lender will provide you with a mortgage commitment letter outlining the terms of your mortgage, including the interest rate, amortization period, and any conditions that need to be met before the mortgage can be finalized.
- Property Appraisal: Your lender will typically require an appraisal of the property you’re buying to ensure that it’s worth the amount you’re borrowing. This is done by a professional appraiser and helps protect the lender’s investment.
- Final Approval and Closing: Once all conditions have been met and the property appraisal is satisfactory, your lender will provide final approval for your mortgage. You’ll then work with your lawyer to complete the closing process, which involves signing the mortgage documents and transferring funds.
Throughout the mortgage application process, it’s important to be responsive and provide any additional information or documentation requested by your lender. Delays or incomplete information can slow down the approval process and potentially jeopardize your ability to secure the mortgage.
Costs Associated with Getting a Mortgage
There are several costs associated with getting a mortgage in Ontario, including:
- Down Payment: The minimum down payment in Ontario is 5% for homes under $500,000. For homes between $500,000 and $999,999, the minimum down payment is 5% on the first $500,000 and 10% on the remaining amount. For homes over $1 million, the minimum down payment is 20%. It’s important to note that if your down payment is less than 20%, you’ll also need to pay for mortgage default insurance (see below).
- Mortgage Default Insurance (CMHC Insurance): If your down payment is less than 20%, you’ll need to pay for mortgage default insurance. This insurance protects the lender in case you default on your mortgage payments. The insurance premium is typically added to your mortgage amount and can range from 2.8% to 4% of the total mortgage value, depending on the size of your down payment.
- Appraisal Fees: Your lender may require an appraisal of the property you’re buying to ensure that it’s worth the amount you’re borrowing. Appraisal fees can range from $300 to $500, depending on the size and location of the property.
- Legal Fees: You’ll need to hire a lawyer to handle the legal aspects of buying a home, such as reviewing the purchase agreement and registering the mortgage. Legal fees can vary widely, but you can expect to pay between $1,000 and $2,000 for a typical home purchase.
- Land Transfer Tax: In Ontario, you’ll need to pay a land transfer tax when you buy a home. The amount of the tax depends on the purchase price of the property and the municipality where the property is located. In Toronto, for example, the land transfer tax is calculated as follows:
- 0.5% on the first $55,000 of the purchase price
- 1% on the portion of the purchase price between $55,000 and $400,000
- 2% on the portion of the purchase price above $400,000
- Home Inspection: While not strictly required, it’s highly recommended to have a professional home inspection done before purchasing a property. Home inspection fees can range from $300 to $600, depending on the size and age of the home.
- Moving Costs: Don’t forget to factor in the costs of moving, such as hiring movers, renting a truck, and purchasing packing supplies.
- Mortgage Penalties: If you’re breaking your existing mortgage term to refinance or switch lenders, you may be subject to mortgage penalties or discharge fees. These can be substantial, so it’s important to factor them into your calculations.
Here’s a table summarizing some of the typical costs associated with getting a mortgage in Ontario:
| Cost | Typical Range |
|---|---|
| Down Payment | 5% – 20% of purchase price |
| Mortgage Default Insurance | 2.8% – 4% of mortgage value |
| Appraisal Fees | $300 – $500 |
| Legal Fees | $1,000 – $2,000 |
| Land Transfer Tax | Varies by municipality |
| Home Inspection | $300 – $600 |
| Moving Costs | Varies |
| Mortgage Penalties | Varies |
It’s important to budget for these costs when planning to purchase a home, as they can add up quickly and impact your overall affordability.
Closing the Deal
Once your mortgage has been approved and you’ve found a home you want to buy, it’s time to close the deal. This involves several steps:
- Finalizing the Mortgage Agreement: Your lender will provide you with a mortgage agreement outlining the terms of your mortgage, including the interest rate, payment schedule, and any prepayment options. Review this document carefully and ensure you understand all the terms and conditions before signing.
- Signing the Documents: You’ll need to sign several documents, including the mortgage agreement, the deed to the property, and any other legal documents required to complete the sale. Your lawyer will guide you through this process and explain each document in detail.
- Transferring Funds: Your lender will transfer the funds for your mortgage to your lawyer’s trust account. Your lawyer will then transfer the funds to the seller’s lawyer, along with any additional funds you’re providing for the down payment and closing costs.
- Taking Possession of Your New Home: Once all the documents have been signed and the funds have been transferred, you’ll be able to take possession of your new home. Your lawyer will provide you with the keys and any other necessary documentation.
It’s important to note that the closing process can take several weeks to complete, so it’s essential to stay organized and responsive throughout the process. Your lawyer and mortgage lender will guide you through each step and ensure that everything is handled properly.
Mortgage Payments and Responsibilities
Once you’ve closed the deal and taken possession of your new home, you’ll be responsible for making your mortgage payments. Your mortgage payment will typically include four components:
- Principal: This is the amount you borrowed from your lender. Each mortgage payment will go towards paying down the principal balance of your loan.
- Interest: This is the cost of borrowing money from your lender. The interest portion of your payment will be higher at the beginning of your mortgage term and will gradually decrease as you pay down the principal.
- Property Taxes: Your lender may collect a portion of your property taxes each month and pay them on your behalf to the municipality. This amount is typically held in an escrow account and adjusted annually based on changes in your property tax assessment.
- Mortgage Insurance: If you have a high ratio mortgage, your payment will include the cost of mortgage default insurance. This insurance premium is typically added to your mortgage balance and paid off over the life of the loan.
You can choose to accelerate your mortgage payments by making additional payments or increasing the frequency of your payments. This can help you pay off your mortgage faster and save money on interest. However, it’s important to check with your lender first, as some mortgages have restrictions or penalties for prepayments.
In addition to making your mortgage payments, you’ll also be responsible for other ongoing costs associated with homeownership, such as:
- Home maintenance and repairs
- Utilities (electricity, gas, water)
- Property insurance
- Condo fees (if applicable)
It’s important to budget for these additional costs when determining how much home you can afford.
When your mortgage term ends, you’ll need to renew your mortgage. This involves negotiating a new interest rate and term with your lender. You may also choose to refinance your mortgage at this time to access equity in your home or consolidate debt.
Conclusion
Getting a mortgage in Ontario can be a complex process, but by understanding the different types of mortgages available, the qualification criteria, and the costs associated with buying a home, you can make an informed decision about which mortgage product is right for you.
It’s important to work with professionals throughout the mortgage process, including a mortgage broker, real estate agent, and lawyer. These professionals can help guide you through the process and ensure that you’re making the best decisions for your financial situation.
If you’re a first-time home buyer or self-employed, there are additional challenges you may face when getting a mortgage. However, there are also incentives and programs available to help you get into the housing market.
By doing your research, working with professionals, and carefully considering your financial situation, you can achieve your dream of homeownership in Ontario.
