We’ve put together this comprehensive guide to help you navigate the process of getting a mortgage in Ontario. With the right information and preparation, you can make the process easier and increase the chances of buying your dream home!
1. Establish a good credit history
Before you even think about applying for a mortgage, check on the health of your credit. It’s one of the most important factors lenders consider when approving a mortgage, and it directly impacts your ability to get a favourable interest rate.
Use the 5 Cs of credit as your guide: lenders use these factors to assess your creditworthiness and mortgage suitability.
Character refers to your credit history and whether you’ve demonstrated responsible borrowing behaviour. To give you a general overview, you can improve your credit score by paying your bills on time, keeping your credit card balances low, and avoiding new credit accounts (like credit cards, loans, and lines of credit).
Capacity is your ability to make your mortgage payments on time. This involves assessing the stability of your income and expenses to determine how much of a mortgage payment you can afford each month. Self-employed individuals should plan early with their accountant or financial advisor to establish proof of consistent income before pursuing a mortgage for the best results.
Capital refers to the money you have available to cover the down payment and other costs associated with buying a home. Sufficient capital can help you secure a mortgage with a favourable interest rate.
Collateral refers to the property used as collateral for the mortgage. Lenders consider the value of the property and its condition to ensure that it’s a suitable investment.
Conditions include the terms and conditions of the mortgage, like the interest rate, the length of the loan, and any other relevant factors. Lenders also take into account market conditions and economic factors when determining the terms of the mortgage.
With these 5 Cs in mind, you can increase your chances of getting approved for a mortgage and securing the home of your dreams.
2. Save for a down payment
One of the most important factors in getting approved for a mortgage is having a solid down payment. A down payment is a percentage of the total cost of the house that you pay upfront.
The minimum down payment in Canada is 5% of the purchase price (plus any closing costs like land transfer taxes, lawyer fees, etc.). However, the more you can put down, the better: a larger down payment can help you qualify for a lower interest rate and reduce your monthly mortgage payments. Also, if your down payment exceeds 20% of the purchase price, you’re no longer required to purchase mortgage insurance.
We know the cost of living is high in Ontario, so how can you afford to save for a down payment? A few of the most effective methods we’ve seen are:
- Increasing your financial inflow by asking for a promotion or raise and immediately directing the added income to your savings
- Changing companies or jobs to boost your income and, again, automatically sending that additional money to your savings
- Earning a second income with a side gig or freelance work
- Saving cash gifts from relatives
- Starting or improving your budget with a financial advisor
- Moving in with parents or roommates for a set time to save the cost of rent
There are many more ideas than these, and we encourage you to speak to a financial advisor to create a plan for your situation and timeline for buying a home.
3. Work with a mortgage broker
To determine how much mortgage you can comfortably carry, we recommend speaking with a mortgage broker or financial planner. This will help you assess your financial fitness and set realistic goals on an achievable timeline. These experts will also be able to identify which government programs you qualify for, especially as a first-time home buyer, to purchase your first home. These include:
- Home Buyers’ Plan
- First-Time Home Buyer Incentive
- Ontario Land Transfer Tax Refund
- First-Time Purchaser Rebate (Toronto only)
- Local homeownership programs in municipalities including but not limited to Simcoe County and Waterloo
Getting a mortgage broker on your team early means you’ll have real data to use when making decisions. They’re able to calculate affordability and recommend a plan to improve your chances of getting a good mortgage. Crucially, unlike your bank, which is only going to recommend its mortgage products, your mortgage broker is able to look at all the products on the market from a range of lenders. They’ll simplify the application process, negotiate better terms and conditions with lenders, and help you avoid expensive mistakes.
What is affordability?
Affordability is a crucial factor when it comes to buying a home. Your mortgage broker will advise you on the mortgage you can afford after considering your debt service ratio, future homeownership costs, and your lifestyle expenses (including family planning, job security, potential home renovations, etc.). They can also tell you which variables you can improve if you want to qualify for a better mortgage.
Understanding affordability is key not only for the mortgage approval process but also because you don’t want to overextend yourself or end up in a situation where you can’t afford your mortgage payments. By planning realistically for the future, you can ensure that you make a smart investment in your home and your financial future.
4. Compare mortgage options in Ontario
There are many different types of mortgages available in Ontario, each with its own set of terms and conditions. It’s essential to compare offers from multiple lenders with your mortgage broker to find the best mortgage for your needs. Some factors you should consider when comparing mortgages include the interest rate, the length of the mortgage term, and any associated fees.
Choosing a mortgage type in Ontario
There are several different types of mortgages available to homebuyers in Ontario. Here are the most common types:
- Fixed-rate mortgage – With a fixed-rate mortgage, your interest rate is locked in for the entire term. This makes budgeting easier, as you’ll know exactly how much your mortgage payments will be each month. Just make sure the rate is reasonable!
- Variable-rate mortgage – With a variable-rate mortgage, your interest rate can fluctuate over the mortgage term. This can be risky, as your payments could increase if interest rates rise.
- Open mortgage – With an open mortgage, you can pay off the mortgage in full or in part at any time without penalty. This can be a good option if you expect to receive a large sum of money (such as an inheritance) that you can use to pay off the mortgage.
- Closed mortgage – With a closed mortgage, there are penalties for paying off the mortgage early. This can be a good option if you want a lower interest rate, but you need to be sure you can commit to the mortgage for the full term.
5. Get pre-approved for a mortgage in Ontario
You’ve heard the term, but what exactly is a pre-approval? It’s an evaluation process where a lender looks at your financials to determine the maximum mortgage amount you qualify for.
To get pre-approved, you or your mortgage broker will need to provide the lender with information about your income, assets, and debts. Then, they’ll review your application and give you a pre-approval letter if you meet their criteria.
Getting pre-approved for a mortgage has several benefits:
- It helps you set a realistic budget – Knowing how much you can borrow and at what interest rate will help you set a realistic budget for your home search.
- It strengthens your offer – A pre-approved buyer is more attractive to sellers than a buyer who hasn’t been pre-approved. It shows that you’re serious about buying a home and have already taken steps to secure financing.
- It speeds up the process – If you’re pre-approved, you’ll be able to move quickly when you find a home you want to buy. You won’t have to wait for your lender to review your application for the first time, which can take several days or weeks.
- It protects you from interest rate increases – If you get pre-approved for a mortgage, the lender will typically lock in your interest rate for a period of time (often 60-120 days). This protects you from interest rate increases while you’re searching for a home.
It’s important to note that a mortgage pre-approval is not a guaranteed mortgage. When you go house hunting and decide to make an offer on a property, the lender who pre-approved you will take additional steps before giving their final approval. These include assessing the home’s value to ensure the purchase price is not over fair market value, updating your application with details specific to the property, and re-verifying your credit score, income, employment, and debt.
It’s important to understand the terms of your final mortgage before signing on the dotted line. You should consider the length of the mortgage term, the interest rate, and the payment frequency. You should also be aware of any penalties or fees associated with paying off your mortgage early. Understanding your mortgage terms can help you make an informed decision and avoid any surprises down the line.
Getting a mortgage in Ontario is a step-by-step process
Becoming a homeowner is a significant decision that comes with a lot of responsibilities. Getting a mortgage in Ontario can be daunting, but as we’ve seen in our comprehensive guide, it doesn’t have to be! That’s especially true when you work with a team like Integrity Tree Financial because we get to know you, your goals and your finances personally and we have access to the best mortgage brokers in Ontario.
Book a call with us to plan a smooth path to getting your mortgage–and increase your chances of buying your dream home!
A 2023 NerdWallet poll showed that owning a home is a priority for 67% of Canadians.