Mortgage Myths Busted: The Ultimate Guide for First-Time Home Buyers in Ontario

Rachel Adams
Feb 11
4 min read

Updated: Mar 10

Navigating the world of mortgages can be overwhelming, especially for first-time home buyers in Ontario. With so much information available, it is easy to find yourself misled by common myths. Understanding the facts is critical for making smart decisions. This guide aims to clear up some widespread mortgage misconceptions that could hinder your path to homeownership.

Myth 1: You Need a 20% Down Payment

Many think that a 20% down payment is essential to secure a mortgage. While this was once the norm, it is no longer the case. In Ontario, home buyers can make a purchase with as little as 5% down on homes valued up to $500,000. For homes priced above that, the minimum down payment increases incrementally.

This flexibility eases the financial load for first-time buyers and opens up opportunities in the housing market. However, remember that putting down less than 20% typically requires mortgage default insurance. This insurance protects lenders in case of default, adding an extra cost to your monthly payments, usually around 0.6% to 4.5% of the mortgage amount based on the size of your down payment.

Myth 2: Your Credit Score Must Be Perfect

Another common belief is that you need an impeccable credit score to qualify for a mortgage. While a higher score certainly improves your chances and can lead to better interest rates, it is not the only criteria lenders consider. Many lenders will work with borrowers with credit scores as low as 600, especially if you have strong income or a sizable down payment.

For example, if your score is slightly below average due to missed payments in the past, taking steps such as paying off debts or disputing inaccuracies on your credit report can significantly enhance your score over time. Additionally, showing consistent income can help compensate for a lower score.

Myth 3: All Mortgages Are the Same

It’s easy to think all mortgages operate the same way, but that's far from the truth. First-time home buyers should know there are several types of mortgages, including fixed-rate, variable-rate, and hybrid options. Each type comes with unique advantages and risks.

For instance, a fixed-rate mortgage offers stability through consistent monthly payments, which can be beneficial for those who prefer budget predictability. In contrast, a variable-rate mortgage may start with a lower rate, but it can change over time based on market conditions, potentially resulting in lower payments initially but higher costs in the long run. Understanding these differences can help you choose the mortgage that aligns best with your financial goals.

Myth 4: You Can Only Get a Mortgage from Your Bank

Many first-time home buyers believe the only place to secure a mortgage is their bank, which can limit options. In reality, there are various lending institutions available, such as credit unions, mortgage brokers, and alternative lenders. Each of these can offer competitive rates and terms.

Working with a mortgage broker can be incredibly beneficial. Brokers have access to multiple lenders and can help you find a deal suited to your financial situation. For example, a broker may secure a rate that is 0.25% lower than what your bank offers, translating into substantial savings over the life of the loan.

Myth 5: Pre-Approval Is a Final Commitment

It’s a common misconception that being pre-approved for a mortgage means you’re locked into a deal. In fact, pre-approval is only an estimate of how much you can borrow based on your current financial situation. It does not bind you to a lender or product.

However, pre-approval is a valuable tool. It clarifies your budget, strengthens your negotiating position when bidding on a home, and can speed up the final loan process once you find your property. Many sellers view pre-approved buyers as more serious candidates.

Myth 6: You Can't Get a Mortgage If You're Self-Employed

Self-employed individuals often worry that securing a mortgage is impossible, but many lenders are willing to work with them. The key lies in demonstrating a stable income and providing sufficient documentation such as tax returns and profit-and-loss statements.

While getting a mortgage as a self-employed person may require more extensive paperwork, it is entirely feasible. For instance, if you’ve been running a successful business for at least two years and have documented earnings, you may have a strong case for loan approval.

Myth 7: Interest Rates are All That Matter

Though interest rates are vital, they are only part of the mortgage equation. First-time buyers often focus solely on rates, overlooking important aspects like fees, penalties, and loan terms. Failing to consider these factors can lead to significant costs down the road.

For example, a loan with a slightly higher interest rate but lower closing costs can end up being cheaper in the long run compared to a loan with a lower rate and high closing fees. Evaluating the overall cost, including potential penalties for early repayment, will lead to a more educated decision.

Myth 8: Closing Costs Are Just a Minor Expense

First-time home buyers often underestimate the closing costs that come with purchasing a home. These costs can encompass legal fees, appraisal fees, and title insurance, among others. Typically, closing costs range from 2% to 5% of the purchase price.

Planning for these expenses ensures you avoid surprises during the final stages of home buying. For a home priced at $500,000, you might face closing costs between $10,000 and $25,000. Always include these in your budget to maintain financial security post-purchase.

Empower Yourself for Homeownership

By breaking down these common mortgage myths, first-time home buyers in Ontario can approach the home buying process with greater confidence and clarity. Being well-informed and realistic about what is necessary to secure financing is crucial.

Educate yourself on these topics, explore your options, and understand your financial situation. With the right knowledge, you're ready to navigate the mortgage landscape and move towards achieving your dream home.