Buying a home in Toronto can be exciting yet challenging. Proper preparation for the mortgage process is key.
Toronto’s real estate market is famously competitive and fast-paced. However, getting a mortgage in Toronto is achievable if you understand the steps and prepare well.
1. Assess Your Financial Readiness
Before you approach any lender, take an honest look at your financial situation:
- Credit Score:
Check your credit report and score. A good credit score (around 680 or above) greatly improves your chances of approval with prime lenders (major banks). If your score is lower, work on improving it by paying down debts, making all payments on time, and avoiding new credit applications. Strong credit will help you qualify for better rates.
- Income & Employment:
Lenders will verify your income and job stability. Generally, you need a steady income high enough to carry the mortgage payments. Debt ratios are important: your monthly housing costs should stay below ~39% of your gross income, and all your debts combined under ~44%. This ensures you aren’t borrowing more than you can afford.
- Existing Debts:
Try to pay down outstanding debts (like credit cards or loans) before applying. Lower debt not only improves your credit score but also reduces your debt service ratios, making it easier to qualify for a mortgage. Lenders prefer borrowers with manageable debt levels.
- Savings for Down Payment:
Calculate how much you have available for a down payment. In Canada, minimum down payments are 5% of the first $500,000 of the purchase price, 10% for any amount over $500,000, and 20% down is required for homes $1 million+. If you put down less than 20%, your mortgage will be a high-ratio mortgage and you’ll need to pay for mortgage default insurance (often bundled into the mortgage). A larger down payment (20% or more) is ideal because it avoids insurance premiums and lowers your monthly payment.
- Mortgage Stress Test:
Be aware that Canadian lenders will apply a stress test to your application. This means you must qualify not just at your actual mortgage interest rate, but at a higher rate (either your rate + 2% or 5.25%, whichever is greater) to ensure you could handle future rate increases. This can reduce the maximum mortgage amount you qualify for, so factor that in when budgeting.
Tip
If some of these areas need work (for example, your credit score is low or you haven’t saved enough down payment), take time to address them before you apply. Improving your financial health now will make getting a mortgage easier. It’s worth the effort because a strong financial profile can open the door to better terms and lower interest rates on your mortgage.
2. Explore Your Mortgage Options
There are many types of mortgages and lenders available. It’s important to understand your options so you can choose what fits you best:
- Fixed vs. Variable Interest Rate:
A fixed-rate mortgage has an interest rate that stays the same for the term, giving you predictable payments and protection if rates rise. A variable-rate mortgage usually starts with a lower rate that can move up or down with the market, so you might save if rates drop, but your payments can increase if rates go up. Consider your risk tolerance and budget flexibility when choosing between fixed or variable.
- Open vs. Closed Mortgage:
An open mortgage can be paid off or refinanced at any time without penalty, offering flexibility to pay it off early – but it usually comes with a higher interest rate. A closed mortgage has a lower interest rate but restricts your ability to prepay – if you break the mortgage or pay off more than the allowed amount, you incur penalties. If you plan to stay in your home long-term and won’t be making large extra payments, a closed mortgage might save you money with its lower rate.
- Conventional vs. High-Ratio:
A conventional mortgage means you put at least 20% down, so no insurance is required. A high-ratio mortgage is when you put less than 20% down; it requires mortgage insurance (through CMHC or a private insurer) but allows you to buy with as little as 5% down. High-ratio loans can actually come with slightly lower interest rates at times (since they’re insured, the lender is protected), but you’ll pay the insurance premium on top. First-time buyers often go with high-ratio if they can’t reach 20% down.
- Lender Options:
In Canada you can get a mortgage from prime lenders (the big banks and traditional institutions) or alternative lenders. Prime lenders typically offer competitive rates but have stricter requirements. Alternative lenders (like credit unions, trust companies, private lenders, or online lenders) might accept lower credit scores or unconventional income sources, though often at higher rates. Mortgage brokers can connect you to many different lenders with one application. Weigh the pros and cons of each lender type for your situation.
Also, research any first-time home buyer programs or incentives you might qualify for. For example, the federal First-Time Home Buyer Incentive offers a shared-equity loan to boost your down payment, and first-time buyers in Toronto can get rebates on land transfer taxes. These programs can help lower your initial costs, so it’s worth seeing if you qualify.
3. Get Pre-Approved for a Mortgage
Mortgage pre-approval is an important early step in getting a mortgage. In a pre-approval, a lender (or mortgage broker on your behalf) will review your finances and confirm how much mortgage they would lend you, under what conditions. This involves a preliminary application where you provide information about your income, debts, and assets, and the lender checks your credit.
Getting pre-approved benefits you in several ways: it gives you a clear budget for house hunting, and it often locks in an interest rate for 60 – 120 days while you look for a home. (If rates go up during that period, your locked rate is protected; if rates go down, some lenders will honor the lower rate.) Pre-approval is essentially a conditional commitment – it is not a final guarantee of a mortgage, but it shows what you likely can afford barring any major changes.
When seeking pre-approval, you can go directly to a bank or consult a mortgage broker. Brokers are useful because they can pre-approve you with various lenders and find the best terms for you. You’ll typically need to provide documents like pay stubs or job letters, bank statements, and consent for a credit check during pre-approval. Once the lender is satisfied, they will issue a pre-approval letter stating the maximum loan amount and the interest rate they’ve reserved for you, along with an expiration date (often ~90 days).
Having a pre-approval in hand makes you a more confident buyer. You know your price range and can act quickly when you find the right house. Sellers and real estate agents will also take you more seriously, since you’ve demonstrated that you likely qualify for financing up to a certain amount.
4. Find the Right Home and Make an Offer
With your pre-approval, you can start house hunting in earnest. Focus on homes in the price range your pre-approval has qualified you for (or below, if you prefer a smaller mortgage). Toronto is a competitive market, so it’s a good idea to work with a knowledgeable real estate agent who knows the city and its pricing trends.
When you’ve found a home you love, you’ll put in a purchase offer. Your offer can include conditions – an important one is often a financing condition, which gives you a window (usually ~5 business days) to secure final mortgage approval for that specific property. If for some reason the lender doesn’t approve that property or your financing falls through, a financing condition lets you exit the deal without losing your deposit. (Note: In red-hot markets, some buyers waive conditions to be competitive, but do so with caution and only if your financing is rock-solid.)
Having a pre-approval adds weight to your offer. It signals to the seller that you’re already vetted by a lender and can likely obtain the necessary funds. In fact, in a multiple-offer bidding war, a buyer with a pre-approved mortgage is in a stronger position than one without.
If you’re in a bidding war (common in Toronto), consider strategies to make your offer more attractive beyond just the price. For example, you might put down a larger deposit as a sign of good faith, be flexible with the closing date the seller prefers, or even include a personal letter to the seller to build rapport. These gestures, alongside a mortgage pre-approval, can help you stand out in a competitive scenario. Remember, the goal is not only to get a mortgage, but to get the house you want – so once you have financing lined up, you want your purchase offer to succeed!
5. Choose Your Lender and Finalize Mortgage Terms
Once your offer is accepted, it’s time to finalize your mortgage. If you already went through pre-approval with a specific lender, you will likely proceed with them for the actual mortgage. However, this is also a juncture to shop around one last time and ensure you’re getting the best possible deal. Interest rates and promotions can change, and now that you have a specific property, some lenders might make a more competitive offer.
Take a moment to compare what different lenders (banks, credit unions, etc.) are offering in terms of interest rate, term length, and conditions. Even a slightly lower interest rate can save you thousands over the life of the mortgage. Also compare features: prepayment privileges (ability to make extra payments), penalties for breaking the mortgage, portability (can you transfer it if you move?), and so on. A mortgage broker can help you gather and explain competing offers from multiple lenders, saving you time and potentially money.
When evaluating lenders, remember that qualifications and flexibility differ. Major banks (A-lenders) typically have the lowest rates but require strong credit and income. Alternative lenders or private lenders may accept clients the banks turn away (for example, if you have a lower credit score or unconventional income) – but their interest rates will be higher on average. For instance, many banks prefer a credit score of 680+ for mortgage approvals, while some alternative lenders will consider scores below that, albeit at higher borrowing costs. Choose a lender that not only gives a good rate, but that you qualify with comfortably and that offers the service level you need.
At this stage, you’ll also confirm the mortgage terms you want:
- Rate Type:
If you were undecided between fixed or variable, you must choose now. Think about where interest rates are headed and what lets you sleep at night (fixed for stability vs. variable for potential savings).
- Term Length:
Commonly 5 years in Canada, but terms can range from 1 to 10 years. Shorter terms give you the chance to renegotiate sooner; longer terms lock in your rate for stability.
- Amortization:
The total length of time to pay off the mortgage (often 25 years for insured mortgages, or up to 30 years for conventional). A longer amortization lowers your monthly payment but means more interest paid overall.
- Open vs. Closed:
Decide if you need an open mortgage (flexible prepayment with higher rate) or if a closed mortgage is fine (lower rate, but you intend to stick with it for the term). Many first-time buyers go with a closed term to get a lower rate, unless they anticipate a big change (like a sale or refinance) in the near future.
- High-Ratio vs. Conventional:
If your down payment was less than 20%, your mortgage will be high-ratio and the lender will arrange mortgage insurance (CMHC, Sagen, or Canada Guaranty). The insurance premium can be added to your mortgage principal. If you put 20% or more down, you have a conventional mortgage with no insurance required.
By the end of this step, you will have selected the lender and mortgage product that best fits your needs. Review their conditional approval for the mortgage and ensure you satisfy any outstanding requirements (such as verifying the source of your down payment, or getting a property appraisal if the lender requires one). You’re now ready to move to the formal application and approval process with your chosen lender.
6. Submit Your Mortgage Application
Now it’s time for the official mortgage application with the lender you’ve chosen. Even if you were pre-approved, you’ll need to submit a complete application for the specific property you’re buying. Provide all required documents promptly to avoid delays. Typical documents and steps in this stage include:
- Identification: Government-issued photo ID to confirm your identity (driver’s license, passport, etc.).
- Income Verification: Proof of income such as pay stubs, a letter of employment, and T4 slips or Notice of Assessment (for self-employed individuals, two years of financial statements or tax returns may be required).
- Down Payment Proof: Bank statements or investment statements showing you have the down payment (and that it’s from your own resources or an acceptable gift, not borrowed). The lender will want to see a 90-day history of the funds to comply with anti-money laundering rules.
- Credit Check: If not done at pre-approval or if it’s been a while, the lender will pull an updated credit report.
- Debt Details: Information on all your current debts and obligations (credit cards, car loans, lines of credit, student loans, etc.), which they use to confirm your debt ratios.
- Property Details: A copy of the accepted Offer to Purchase for the home, MLS listing info, and possibly an appraisal or inspection report. The lender needs to review the property value and condition to finalize the mortgage. In Toronto, with very high home prices, an appraisal is common so the bank can ensure the price you’re paying is in line with market value.
- Insurance: You’ll need to arrange home insurance (property insurance) and provide proof to the lender before closing, as the lender requires the home (their collateral) to be insured. If it’s a condo, usually the building insurance is handled by the condo corporation, but you may still need condo unit insurance.
- Any Additional Documents: The lender might ask for other items depending on your situation – for example, divorce or separation agreements (if alimony or child support is part of your finances), or gift letters (if your down payment is a gift from family).
Having your documents well-organized will make this process smoother. The lender (or your broker) will submit your file to the underwriting department for final approval. During underwriting, be prepared for the lender to possibly ask for clarification or more information. This is normal – it could be as simple as explaining a bank account transfer or providing an updated document. Respond quickly to any requests to keep things moving.
The timeline from application to final approval can range from a few days to a couple of weeks, depending on how complex your file is and how quickly you supply documents. Keep in close contact with your mortgage broker or loan officer during this period. They will let you know once the mortgage is formally approved (often called a firm approval or commitment), meaning the lender is ready to lend you the money for the home under the agreed terms.
7. Close the Deal
Closing day involves signing the final mortgage documents and paying the remaining down payment and closing costs.
Closing is the final step where everything comes together. Once your mortgage is approved and all conditions are met, you’ll meet to sign the final paperwork for the mortgage and the property transfer. In Ontario (including Toronto), closings are typically handled by a lawyer or notary. They will prepare the mortgage contract, title transfer, and other legal documents for you to sign. Review these documents carefully – confirm the interest rate, term, payment amount and schedule, and any special conditions one last time before you sign. If anything is unclear, don’t hesitate to ask your lawyer or lender questions.
On closing day, you will also need to pay your remaining down payment (the portion not already covered by your initial deposit) and all the closing costs. These costs can add up to 1.5% – 4% of the purchase price in Ontario, so hopefully you have budgeted for them. Common closing costs in Toronto include: land transfer taxes, legal fees, title insurance, home insurance setup, and adjustments for prepaid property taxes or maintenance fees.
Note that Toronto homebuyers pay two land transfer taxes – one to Ontario and an additional municipal one to Toronto. (First-time buyers are eligible for rebates on both to reduce this expense.) Also, if your mortgage is high-ratio, the insurance premium is usually added to your mortgage principal, but you will pay the provincial sales tax on that insurance premium at closing as well. Your lawyer will provide a detailed breakdown of all amounts owing on closing day.
Once all documents are signed and the funds have been transferred (your lender sends the mortgage money to your lawyer, and you provide your down payment and cost payments), the deal is closed! You will receive the keys to your new home and officially become the owner as of the closing date. Congratulations – you’ve successfully navigated the mortgage process and home buying in Toronto!
Conclusion
Getting a mortgage in Toronto may seem complex, but by breaking it into steps it becomes much more manageable. The key is careful preparation – getting your finances in order, learning about your mortgage options, and obtaining a pre-approval so you can act with confidence when you find the right home.
Finally, remember you don’t have to do it alone. Consider enlisting a mortgage professional to help you along the way. With the right team on your side, getting a mortgage in Toronto can be a smoother and more rewarding journey. Good luck with your home purchase!
