Canada’s red-hot housing market may overwhelm first-time home buyers. But don’t let the challenges of homeownership or being a new apartment owner deter you. 39% of 1,018 Canadians surveyed by Harris Poll want to buy a home within five years, despite high prices and low inventory. Even more Canadians (18%) want to buy within two years. Before investing, you should be prepared for market fluctuations. Here are some home-buying tips to consider.
Cost Considerations for Owning a House in Canada
To Buy a House or Not?
Instead of being at the whim of a landlord who may decide to stop the facility of the rental apartment, you can live on your terms. Buying a Canadian house is like a secure investment as they tend to appreciate over time.
Josh Davie, a financial consultant with Desjardins Financial Security Investments Inc., says home ownership is a common goal but not for everyone. “It all depends,” he says. If your job is unstable or you intend to relocate soon, renting may be a better financial option than purchasing. Renters avoid upkeep and property taxes. Don’t buy real estate if you’re not financially ready or lack money management skills, warns Davie.
Sharon Patton contends that renting is preferable for hands-off life since the landlord handles maintenance and upkeep. Renting avoids property taxes, utilities, maintenance, and unforeseen repairs.
Costs in Homebuying
First-time homebuyers often require loans. Buying isn’t free. These costs may go up fast and must be tracked. Always expect additional, hidden expenditures. Here’s a breakdown.
Let’s discuss the down payment or the initial cash you’ll need for your new property. Your down payment must come from savings, a gift, or your 401(k) (RRSP). In Canada, down payments depend on the home’s purchase price, not the buyer’s income.
First-time buyers have a lesser down payment than repeat buyers since they have less equity. If your property’s value improves, you may use the equity to put down more on your future home. Mortgage loan insurance is an extra cost for purchasers who don’t pay 20% of the purchase price.
A down payment is typically required when buying a property. Your deposit is normally non-refundable if you cancel the transaction before it closes.
Canada has no minimum deposit. 5% of the buying price ($50,000 for a $1 million property) is typical. Some sellers are accepting for less than 5% due to rising house prices. (If there are several offers on a property, the seller may raise the price.) In competitive house markets, a 5% deposit shows the seller your sincerity. It’s vital to have access to cash within 24 hours after signing a real estate contract.
|Purchase price||Minimum down payment required|
|Budget of less than $500,000||5-percent of-the-total-cost Discount|
|$500,000 to $999,999||10% of the amount above $500,000 + 5% of the first $500,000|
|Over a million dollars||The equivalent to 20% of the total price|
There are closing costs. “Closing expenses usually come from the down payment,” says Patton, so I start every customer conversation with them. Legal counsel, land transfer taxes, and other administrative costs may total 1.5–4% of the property’s acquisition price. You’ll need to pay closing costs even with a $50,000 down payment.
You’ll also need money for a house inspection, putting the utilities in your name, and paying back the prior owner for any prepaid responsibilities (such as property taxes or condo dues).
Patton thinks you’ll need 6.5% of the purchase price in addition to your down payment. Finally, put aside money in case of an unforeseen expenditure, such as fixing a broken appliance or replacing a worn-out HVAC element. She recommends saving $5,000 to $10,000 for a $600,000 property.
Grants and Tax Benefits for New Homebuyers
Under the Home Buyer’s Plan, individuals may withdraw up to $35,000 ($70,000 for a couple) from their RRSPs. You won’t owe taxes or a penalty if you return the money within 15 years.
First-Time Home Buyer Incentive provides an interest-free loan of up to 10% of the purchase price to first-time homebuyers. The government must restore its stake in the residence after 25 years or upon its sale at fair market value. Mortgage specialist Patton cautions that the scheme may limit how much first-time buyers spend. In the 2022 budget, the government said the program will be extended through March 31, 2025. The government is “exploring ways to make the programme more flexible and sympathetic to first-time homebuyers, particularly single-led households.”
House Buyers’ Tax Credit is available to Canadians who haven’t owned a home in four years. First-time homebuyers may get a $5,000 ($750) tax credit. The federal government proposes raising the credit from $5,000 to $10,000 for homes bought after January 1, 2022. First-time homeowners may get $1,500 under the new incentive.
First Savings Account – The 2022 federal budget included this new kind of registered account for first-time homeowners. Like a TFSA or RRSP, interest, dividends, and capital gains are tax-free when withdrawn. Homebuyers can’t contribute to the FHSA and the Home Buyers’ Plan (up to $8,000 annually). Unused donation space is lost. After 15 years, FHSA funds must be used to buy a home, transferred to an RRSP or RRIF, or withdrawn as taxable income. The government’s partnership with banks will make FHSAs available in 2023.
Qualified buyers in Ontario, BC, PEI, and Toronto may get land transfer tax refunds (the only municipality in Ontario to levy a land transfer tax of its own). Territory-specific eligibility and payment amounts.
What is a Mortgage?
A mortgage is a loan used to buy property. A mortgage has an interest rate and amortisation (payment) schedule like any other loan. The residence is collateral for a mortgage. This means the lender may take back the home if the borrower fails.
Before filing a mortgage application, consider the following.
- Your mortgage arrangement requires monthly payments. Six-month-to-five-year contracts are common.
- Mortgage amortization is the number of years to repay the loan. Depending on your down payment, most Canadian lenders offer amortization terms between five and twenty-five years, or even thirty. Mortgages are generally paid off over several years.
- The interest portion of your monthly mortgage payment decreases the principal.
- How flexible you want your mortgage repayment terms is what determines their openness. You’ll need an open mortgage if you want to renegotiate, refinance, or repay your debt. All wriggle space goes after the mortgage is finalized. Such loans usually have lower interest rates.
Fixed and variable mortgage rates exist. Fixed rates don’t vary monthly payments. Variable interest rates change with market conditions.
Fixed vs. Adjustable Mortgages
Canadian mortgage customers may pick a fixed or variable rate. Interest rate type affects total mortgage interest paid. Your mortgage interest rate will be “fixed” or variable (called “floating”). Let’s compare fixed and variable 5-year mortgage rates to help you decide.
Five-year mortgages have set interest rates, so you’ll know how much you’ll pay each month. Fixed rates are steadier but cost more.
Five-year mortgages with adjustable rates have five-year maturities. Changeable-rate loans, unlike fixed-rate mortgages, have variable interest rates. Depending on your mortgage, your monthly payment may increase, decrease, or stay the same when interest rates change.
How Much Mortgage Can I Afford Each Month?
After saving for a large down payment, determine how much mortgage you can afford and the amount payable each month with interest. Your mortgage will be the home’s price minus your down payment.
GDS and TDS ratios help lenders determine how much mortgage you can afford depending on debt and income.
Your mortgage amount will depend on your income, debt, and predicted housing costs. Divide your monthly housing expenditures (mortgage, utilities, taxes, and condo fees, if applicable) by your monthly family income to calculate TDS. The gross debt service ratio (GDS) is computed by aggregating all monthly debt payments (including mortgage/rent, auto payments, and credit card/store card interest and principal) and dividing by gross monthly income.
CMHC, Canada’s national housing agency, considers a home affordable if your GDS and TDS are less than 39% and 44% of your gross income, respectively. The Financial Consumer Agency of Canada sets maximums for GDS and TDS at 32% and 40%.
Calculating mortgage options
Comparing mortgage options might be difficult for first-time buyers. Mortgage calculators are useful. Online tools show how a mortgage will affect your budget. Is a mortgage possible now? Can you predict how changing your interest rate or amortization duration will affect your monthly mortgage payment? A mortgage calculator may solve these issues.
“Pre-approval implies you have everything for approval,” says Patton. Putting your credit record, income verification, and debt-to-income ratio in order is enough. She adds that down payment monies must have a 90-day history to avoid money laundering (when criminals conceal money through real estate transactions).
Patton says a mortgage pre-approval ensures you know how much you can put down. She advises avoiding searching for $900,000 homes if you can only afford $750,000. Pre-approval for a mortgage involves concentrating on the correct houses. The seller will notice that you are a serious buyer and that your finances are in order, which is vital in today’s competitive housing market.
Exactly how much money do you have right now?
Knowing what banks and lenders would lend is one thing; knowing how much home you can buy is another.
TDS and GDS ratio requirements are important but based on averages, not individual demands. The best approach to establishing what you can spend each month without feeling poor is to set a precise budget (meaning, your mortgage payments are so high that you have little money left over for other things) (meaning, your mortgage payments are so high that you have little money left over for other things). Include food, phone, entertainment, and travel costs.
A mortgage lender has no means of knowing that two families with the same income will have radically different housing budgets due to lifestyle disparities. Patton: “We don’t know your day-care costs.” Before signing a mortgage, consider your commute and gas costs.
Where can I obtain stress test info?
“Mortgage stress test” sounds familiar. These standards help lenders determine whether a person qualifies for a mortgage and how much they may borrow. This regulation applies even with a 20% down payment.
Patton says the Canadian government created the stress test to ensure homeowners could make mortgage payments if interest rates soared. She cautions that low mortgage rates won’t stay forever. This prevents further interest rate hikes.
2021 will bring new mortgage stress tests. New laws require lenders to use a benchmark rate 2% higher than yours.
The stress test is required for all Canadian mortgage applicants, not just first-timers.
Mortgage Lenders and Brokers
Many first-time homebuyers choose the bank where they already have an account because they know the personnel. Some individuals find retaining all financial links within the same family more comfortable. Comparing costs online and engaging with a broker might save time and money. A mortgage broker searches a vast pool of lenders to find the best one for you.
“If you go to your bank, you just have one lender, but if you go to a broker, you have access to numerous lenders”
A broker can help you choose a financial institution that matches your requirements, such as new immigrants to Canada or self-employed persons.
Best Canadian Neighbourhoods to Buy a Home
- Bancroft and Woodstock’s Ingersoll Neighbourhoods
- London, St. Thomas
- Huron Perth
- Greater Moncton
- Grey Bruce Owen honour Sound
- Kawartha Lakes
- North Bay
- The Georgian Strait, Southern
- Metro Montreal
- Greater Kawarthas/Peterborough
- Kitchener Waterloo
- Winnipeg, Barrie, Guelph
- Vancouver-Saskatoon Insula
- Okanagan Valley St. John’s NL
- Toronto City
- Oakville Milton
After Buying Your First Home
After buying your first home, there are urgent concerns to handle. Patton says homebuyers need property insurance. You may negotiate a package agreement with their existing motor insurer to save money. You should also consider life and disability insurance. Having dependents makes this crucial.
Patton recommends establishing a savings account for unexpected and regular repairs. Set aside a monthly amount (a percentage) for this.
Davie advises adaptability,
“As a homeowner, you’ll need to construct a new budget, and it may change regularly in the first year or two as you learn to manage your property.”
Pay your mortgage and other bills on time to maintain a good credit rating and expedite future mortgage applications. You never know whether your first residence will be your last, so you may need to do this again.
Best wishes, first homebuyer! Your tedious hunt for new apartments for rent stops now.
A mortgage broker can help you determine how much you can afford and whether state, provincial, and federal programs aid could be available to buy your own house.
If you’re a first-time buyer, it might assist in familiarising yourself with the local housing market via reading, research, and regular updates.