Buying a home for the first time is a big step! There are so many things to consider. The down payment, applying for a mortgage and home insurance considerations might be a few of the things making your head spin right now! If you feel overwhelmed, don’t despair, we’ve created a guide for first time home buyers in Canada. Keep reading to learn everything you need to know.
Establish your costs and budget
Before you visit open houses, you need to be aware of the costs involved so you can determine your budget. Think about what you can afford to pay for a mortgage each month and how much you must save for your down payment.
In addition to your monthly mortgage payments, there are additional costs first time homeowners might forget to consider:
- Home inspection fee
- Property appraisal
- Lawyer’s fees, including title search
- Land transfer tax
- GST or HST
- Property tax
- Condo fees (if applicable)
- Mortgage loan insurance
- Home insurance
- Moving costs
- Renovation costs
We don’t mean to scare you with all these additional costs! However, it’s important to take these into consideration as you start to look, so that you stay within your budget.
How much should a down payment be on your new home?
In Canada, you are required to put down at least 5 per cent of the home purchase price as a down payment. If your down payment is less than 20 per cent, you will need to purchase mortgage default (loan) insurance.
Keep in mind that every circumstance is different. If you are self-employed or if you have a poor credit history, you may need to make a larger down payment.
For homes between $500,000, and $1 million, you’ll need 5 per cent of the first $500,000 and 10 per cent of the rest of the price. For homes valued at $1 million or more, the minimum down payment is 20 per cent.
Benefits of larger down payments when buying a home
There are many benefits to making a large down payment on your new home, which include:
- Less interest paid overall
- Lower monthly mortgage payment
- Smaller payments on mortgage default insurance
- A pass on purchasing mortgage default insurance if your payment is large enough
- More equity in your home
If you aren’t able to make a significant down payment, you may want to consider saving up until you can.
What to expect when applying for a mortgage
A key step to help you establish your budget is to get pre-approval for a mortgage. The preapproval amount is the maximum you may get for a mortgage. It doesn’t guarantee that you’ll get a mortgage for that amount, but it gives you a set of parameters to work with. You can get mortgage preapproval from mortgage lenders (banks) and mortgage brokers – independent experts who shop around for the best rates – similar to an insurance broker.
Once you’ve found the home of your dreams, it’s time to apply for the actual mortgage. Don’t be scared! It’s a very grown-up thing to do, but we promise you can handle it.
You’ll quickly learn buying a home involves a lot of paperwork. Here’s a list of all the documents you’ll need for both pre-approval and when applying for the actual mortgage:
- Letter of employment
- Copies of recent pay stubs
- Notice of Assessment
- Previous employment
- Additional income sources (if any)
- List of current assets and liabilities
- Bank account and transit number
- Pre-approved mortgage certificate (if applicable)
- A copy of the real estate listing
- A copy of the accepted purchase and sale agreement
- The property’s full address, including legal description and postal code
- Property tax estimate
- Condo fees (if applicable)
- For rural properties you’ll need the well and septic certificates
- Lawyer’s name, address, postal code, telephone, fax number and email address
Believe it or not, this is not an exhaustive list! You may need additional documents and information if requested by your lender. You can be as prepared as possible by gathering the above documents and having them ready.
Types of mortgages
Not all mortgages are created equal! Here are a few of the different types of mortgages in Canada:
Open mortgage
An open mortgage is more flexible than a closed mortgage. However, it usually comes with higher interest rates. It’s a good option if you plan to pay off your mortgage in less time, or if you anticipate having extra money to put towards your mortgage.
Closed mortgage
A closed mortgage usually has a lower interest rate than an open mortgage but with a similar term length. Closed mortgages have limits on the amount of money you can put towards your mortgage every year. A closed mortgage is a good option if you plan to keep your home for the length of the loan term.
Portable mortgage
This type of mortgage allows you to transfer your existing mortgage to a new home you have chosen to buy. Not all mortgages are portable. Check with your lender to see if this is an option.
Variable rate mortgage
In this type of mortgage, the interest rate is not fixed. Your regular payments will stay the same, but the interest rate could change depending on the conditions of the market. That means the amount of money that goes toward your principal loan could vary.
Fixed rate mortgage
A fixed rate mortgage has a fixed interest rate, meaning the interest rate does not change. This is a very popular type of mortgage and is preferred for those who want stability and predictable payments.
First time homebuyer incentives
There are a few different options and incentives if you are buying a home for the first time. Take a look and see if any of these options apply to your situation:
RRSP Home Buyer’s Plan – This allows first-time homebuyers to withdraw up to $35,000 from their RRSP (or $70,000 for a couple) to finance a down payment. The RRSPs must be at least 90 days old and you must sign an agreement to build or buy a home. As long as you repay within 15 years, the withdrawal is tax-free.
First-time Home Buyers’ Tax Credit – The FTHB offers a $5,000 non-refundable income tax credit amount on a qualifying home acquired after January 27, 2009. For an eligible individual, the credit can provide up to $750 in federal tax relief.
GST/ HST New Housing Rebate – This incentive reimburses eligible homeowners for part of the GST/HST paid on the purchase price or cost of building a new house, on the cost of substantially renovating or building a major addition onto an existing house, or on converting a non-residential property into a house.
Land Transfer Tax Rebate – First time home buyers in BC, Ontario, or Prince Edward Island can receive a rebate on a portion of the land transfer tax that they paid. Also, first-time homebuyers in the City of Toronto are also eligible to receive a rebate on the city’s land transfer tax.
Insuring your new home
Congratulations – you’ve purchased your first home! This is an exciting accomplishment you should be proud of. For most people, a home is the biggest investment they’ll ever make. That’s why it’s important to protect it with the right home insurance. Good news - a BrokerLink insurance broker can do all the work for you, and put together a home insurance policy that is tailored for your needs.
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Buying a home in Canada FAQs
How do I qualify for mortgage if I’m a non-resident?
Non-residents can apply for a mortgage in Canada, but the rules are slightly different. For example, you will need to make a higher down payment and you will need a letter of reference from a bank outside of Canada. To learn more, talk to a representative from a recognized Canadian lender.
I’m a non-resident and want to purchase a property in Canada with a resident. How will that be treated?
When it comes to buying a home in Canada, there are different rules for non-residents. For example, you may need to make a higher down payment. In some areas of Canada, additional taxes may apply to non-residents. If you are purchasing a home with a resident, for example your spouse, you may be exempt from some of these rules. We suggest you discuss your specific situation with a mortgage broker, your lender or a lawyer.
What kind of taxes will I have to pay when buying my first home?
When buying your first home, you will have to pay HST or GST. You will have to pay property tax as well. You may have to pay a land transfer tax depending on where you live. The exact taxes may vary depending on what province or city you live in. Talk to your lender to learn more.
