You Need to Do Your Homework Before Buying a New Home

Toronto is a relatively young city, and with a young city comes new opportunities, new housing, and most importantly, new families. Real estate is one of the most promising and safest investments you can make in order to set a foundation for your future. With that in mind, we asked a young professional gentleman currently renting and working in downtown Toronto to define these six random terms that every homebuyer should know. He is 29 and is saving for his first home, keeping his eye out for the right pre-construction condo in which to invest.

The quotes are what he thinks the terms mean, and then we correct him (if we needed to). He got a few of the definitions mostly right, but some were phrased as if they were questions, suggesting that he’s not entirely confident in his answers. The point is, if you’re saving to buy your first home, you need to do some homework so that you’re not overwhelmed by the process.

Adjustable-rate mortgage

WHAT HE THINKS: “A higher risk mortgage that is open to fluctuation and potentially lower rates at the expense of the stability offered by a fixed rate mortgage?”

It is correct that the interest rate fluctuates, so technically it is higher risk because the rates depend on market conditions. Since the Bank of Canada just cut their key rates to 0.5%, there is some worry that more homebuyers will be tempted to acquire more debt at lower interest rates.

Prequalified

WHAT HE THINKS: “Being approved for a purchase or mortgage by your bank before entering into the process of purchasing a new home?”

He was close on this one. If you are prequalified, it means you have a general idea of what loan amount you MIGHT qualify for. You’re still far from being preapproved, which means you’ve submitted documents like pay stubs and tax returns because you are committed to purchasing a new home when you find it.

Amortization

WHAT HE THINKS: “How costs balance over time?”

Kind of. It’s actually the length of time that it will take to pay off your debt. With a 25-year amortization, the loan will be spread out over the course of 25 years and you will pay on a monthly basis.

Closing costs

WHAT HE THINKS: “The costs associated with the finalization of the sale of a home.”

Nailed it. It is important to note that these costs are in addition to the purchase price of the home; things like legal fees and home inspections. These costs are usually due on closing day, the day the sale of the property becomes final. The Canada Mortgage and Housing Corporation (CMHC) estimates that closing costs could range from 1.5% to 4% of the purchase price.

Open mortgage

WHAT HE THINKS: “A mortgage that doesn’t penalize you for paying larger portions to try and avoid costly longer term interest?”

Absolutely! If you have a closed mortgage, you could be charged penalties for paying too much too quickly. Otherwise, how would the bank get their money?

Delinquency

WHAT HE THINKS: “Bart Simpson-esque behaviour? I have no idea… the reduction of value over time?”

Delinquency is when you fail to make a mortgage payment on time. To be fair, Bart Simpson would probably be guilty of this.

These are just a few of the confusing terms that you may encounter when deciding to buy your first home. To see a long list of other terms that will make you scratch your head, visit this CMHC page.