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How Much Does A Mortgage Cost In The GTA?

There’s a lot of talk about high home prices and affordability. With the upcoming election, many Canadians have house affordability at the front of their mind.

One of the biggest ways to affect your home affordability is to get a great mortgage - but mortgages can be surprisingly costly if you don't know what you need. Let's take a look at what your mortgage will actually cost you.

 

What Does A Mortgage Cost, Really?

There are a couple factors that are easy to overlook when getting a mortgage that can dramatically change your perception of affordability. That’s because getting a mortgage isn’t a stand-alone event – you’re also getting a house along with it.

When buying a home you have to calculate your closing costs as well as your mortgage interest and CMHC premiums, if required. Closing costs are usually budgeted as between 1 – 2% of the purchase price and include things like paying real estate lawyer fees and home inspections.

Mortgage interest is a large expense, but because it’s paid back over a long period of time it doesn’t feel as bad as closing costs, despite the fact that it’s much more expensive.

Of course, if you’re getting a mortgage on a home you already own (whether you’re refinancing or getting a second mortgage) you won’t have closing costs, but there may be other fees to consider, such as breaking your current mortgage or second mortgage origination fees.

The total cost of a mortgage goes beyond just the interest rate, so let’s take a look at the different costs.

 

Just The Mortgage

Let’s start with what just a mortgage would cost, then see what other things you may have to pay for depending on the type of mortgage you get.

Home Purchase Mortgage

If you’re purchasing a home, you’ll most likely need a large mortgage – especially if you’re a first time homebuyer. The average condo price in the GTA as of May 9, 2019 is $434,293. This figure uses data from the following municipalities:

·        Aurora

·        Barrie

·        Brampton

·        Burlington

·        Hamilton

·        Markham

·        Mississauga

·        Newmarket

·        Oakville

·        Oshawa

·        Richmond Hill

·        Toronto

·        Vaughan

·        Whitby

In order to spend the least amount possible on mortgage interest, you need to bring 20% of the purchase price as a down payment. While it’s possible to buy a home with as little as 5% down, it ends up costing you more in the long run. See: Should I Pay CMHC Just To Get A Lower Rate?

The cheapest option when buying a home would be not to get a mortgage at all, but that’s not realistic with current home prices. 20% down is a sort of “sweet spot” when getting a mortgage because it’s the least amount you have to pay to avoid CMHC premiums. That can save thousands of dollars over the course of a mortgage, and is possible to save for many homebuyers. We’ll call this the Cheapest Reasonable Option (CRO). Bringing 20% down also allows you to extend your amortization to 30 years, rather than 25 years. Lengthening your amortization reduces your monthly payment but increases the total cost of interest.

The minimum down payment you need to buy a home in Canada is 5%, which is definitely easier to save for than 20%. As a downside, you’ll end up spending more over time because of CMHC premiums rolled into your mortgage. We’ll call this the Easiest Option (EO).

At a purchase price of $434,293, the CRO is to bring $86,858 as a down payment for a total mortgage amount of $347,434.

The EO is to bring $21,714 as a down payment for a total mortgage amount of $429,083.

Here’s the cost of this mortgage for three different scenarios:

1.      The CRO with a 25-year amortization

2.      The EO with a 25-year amortization

3.      The CRO with a 30-year amortization

 

CRO (25 Years)

EO

CRO (30 Years)

Purchase Price

$434,293

$434,293

$434,293

Down Payment

$86,858

$21,714

$86,858

Amortization

25

25

30

Mortgage Amount

$347,434

$429,083

$347,434

CMHC Insurance Premiums

$0

$16,504

$0

Interest Rate

3.19%

2.94%

3.19%

Monthly Payments

$1,679

$2,018

$1,497

Total Cost of Interest

$157,199

$177,335

$192,795

 

You can see that extending your amortization to 30 years dramatically increases the cost of interest, but also reduces your monthly payment by nearly 11%. You can also use pre-payment privileges to accelerate your mortgage repayment, saving you thousands in interest.

When possible, it’s usually better to extend your amortization because it frees up your cash flow. You can then use that extra money to invest, pay off debt, or accelerate your mortgage. When properly using the extra cash, the returns you make could be much higher than the increased cost of interest.

Now that we have an idea of the actual cost of just a mortgage, let’s take a look at the different scenarios that affect how much more you’ll have to pay.

 

Purchasing Your First Home

Purchasing your first home is the biggest hurdle when it comes to real estate. You don’t have any equity that you can use towards a down payment to make your home affordability better, so you have to come up with the down payment on your own (perhaps with the help of a gifted down payment).

There’s also costs associated with buying a home that have nothing to do with real estate or mortgages. What if you need furniture, dishes, or appliances? If you were renting or living at home, you may not have needed to purchase things like toilet plungers or vacuum cleaners.

While every home purchase requires you to pay property tax, if you have a home to sell you might get some money back from the buyers who have to take responsibility for any pre-paid taxes. Buying your first home means you take the full brunt of any upcoming or pre-paid property tax.

On the bright side, you do get a land transfer tax rebate (if you qualify). To get a land transfer tax rebate, you have to live in one of the participating provinces (Ontario, British Columbia, or PEI). In Ontario, the rebate can be as much as $8,475 for qualifying buyers in Toronto, or $4,000 for buyers elsewhere in Ontario. Buyers in BC can qualify for up to $8,000 in rebates, and PEI residents get 100% of their tax covered if they qualify.

 

 

CRO (25 Years)

EO

CRO (30 Years)

Necessary Household Items

$500

$500

$500

Closing Costs

$6,500

$6,500

$6,500

Land Transfer Tax

$5,115

$5,115

$5,115

Land Transfer Tax Rebate

-$4000

-$4000

-$4000

Property Taxes (1 year)

$1,688

$1,688

$1,688

Total Cost (first year)

$20,751

$22,229

$20,784

 

The total cost, including interest and other expenses, of getting a mortgage in the first year in the GTA is between $20,000 and $23,000. The less you put down, the more you’ll end up paying in interest.

Notice that there’s almost no difference between the amount of interest paid between the CRO (25 years) and CRO (30 years). If you take into account the money you save on the monthly payment, it can actually be cheaper to get a 30 year amortization (depending on how you use that saved money).

This cost goes up if you’re not a first time homebuyer, as you lose the benefit of the land transfer tax rebate. Also, if you buy in Toronto you have to pay double the land transfer tax (but also get double the rebate if you qualify).

The best way to save money on your mortgage is to get the best mortgage interest rate available. The best way to find the best mortgage rate today is to compare them here. Even a small change in the interest rate can save you thousands of dollars over the first 5 years of your GTA area mortgage.


Chris Chris 05/17/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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