Mortgages for first time home buyers
Get the best mortgage you can:
Mortgages for first time home buyers
get the best mortgage you can:
First time home buyers overview
5 Government Tax Credits and Rebates available to First Time Home Buyers
The Canadian Government realizes this can be very expensive and wants to help people get started on the housing ladder.
1 /RRSP Home Buyers’ Plan (HBP)
If you haven’t purchased a home within the last four years the ‘Home Buyers Plan’ allows you (and eligible co-purchasers) to borrow up to $25,000 from your RRSP for a down payment, tax-free. Must be paid back within 15 years.
2/ First-Time Home Buyers’ Tax Credit
The First-time Home Buyers’ Tax Credit of $750* is to help offset some of the closing costs and must be claimed on your tax return within the year of purchase. *combined claim of all co-purchases cannot exceed $750.
3/ Toronto first-time homebuyer land transfer tax rebate
Property up to $400,000 tax free thereafter budget (2%) $2000 tax for every $100,000 of property value.
4/ Ontario first-time homebuyer land transfer tax rebate
Property up to $368,000 tax free thereafter budget (2%) $2000 tax for every $100,000 of property value.
5/ GST/HST New Housing Rebate
If you buy your home before it’s built, or if you substantially renovate an existing home, you could qualify for a rebate for a portion of the sales tax. (36% of GST and 75% of Provincial up to $400,000) – For budgetary purposes expect to get back a little over 50% of the 13% HST up to property value $400,000, and $1800 for every $100,000 of property value thereafter.
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First-time home buyers guide to getting a Mortgage
Everything you need to know about purchasing your first home — from getting the best interest rate on your mortgage to making sure you’re taking advantage of every tax credit available to you.
Securing your mortgage
Buying a home is expensive. Rarely does a person actually have enough money to buy one outright. This is where lenders come in, giving you the chance to take out a loan that will be secured by the value of your home. That’s known as a mortgage. Let’s take a dive into what a mortgage is, the different types available to you and how you service one over its lifetime to eventually fully own your home.
What is a mortgage?
A mortgage is a loan that is backed by real property. It is provided by a lender, and will be bound by terms (which include the interest charged on the mortgage). When you qualify for a mortgage, you will be given a specific amount of time by your lender to pay it off. Failure to make payments can result in the bank taking over your home as collateral against your failure to repay your loan.
What is a mortgage term?
Mortgage terms range from six months to ten years, and refer to how long you and the bank agree you will pay a certain rate, or in the case of variable rate mortgages, how long the rate will fluctuate. Typically at the end of a term, you sit down to refinance your mortgage — at which point, you can also change from a fixed to variable rate, or vice-a-versa.
What is mortgage amortization?
Amortization refers to how long you have until you must pay off your loan. This shouldn’t be confused with your term — that refers to how long you’ve agreed to a certain rate. Amortization periods in Canada are capped at 25 years, with certain exceptions. Prior to 2012, amortization periods ran as long as 35 years.
How is a mortgage term different from an amortization period?
An amortization period is the length of time it takes to pay off your mortgage. A mortgage term is the length of time you’re committed to a specific set of mortgage conditions (rate, lender, etc.)
Your mortgage agreement usually stipulates your interest rate (and the method in which it’s calculated), your payment schedule, and other details, like prepayment options and break fees. Most lenders offer terms ranging from 6 months to 10 years, with 5-year durations being the most popular. At the end of the term, you can renegotiate your mortgage and move into a new product.
Amortization is the process of paying off a loan over a period of time by making regular payments toward both interest and principal. The amortization period is the total amount of time it’ll take to pay off your mortgage loan. Most mortgages in Canada have an amortization period of 25 years.
Building new credit to get mortgage
To build credit you need to get a good name for yourself in the eyes of lenders, they need to know that when you borrow money that you’ll pay it back in a timely fashion. So now you need to borrow some money and repay it to prove it. How can you build a credit history if no one will give you credit?
There are some lenders who will take the risk and give you the first steps to establish your credit history.
Here are some Lenders who can help you build good credit:
- Apply for a credit card at your favourite department store.
- If you’re a student, apply for a student credit card. Credit card companies offer students cards as a way of making them customers when they get start their careers.
- Start a cell phone contract with a monthly bill.
- Get a family member or friend to co-sign a loan with you. Be aware that if you fail to pay the loan the cosigner will be responsible for the debt.
- Get a Secured Credit Card, which is a credit card secured against a cash deposit or savings account. If you fail to make your credit card payments you give the credit card company permission to take the funds from your savings account. This is a great way to develop your credit.
Build the habit of paying off your full balance every month otherwise you will pay interest which will mount up surprisingly quickly making it very difficult to pay off later. Once you’ve shown that you’re a responsible borrower more credit will open up to you.
Fixed versus variable Mortgage: what’s the difference?
Fixed-rate mortgages have a constant interest rate on them over the term of the mortgage. Variable mortgages, meanwhile, track market interest rates and so fluctuate. In economic cycles where interest rates are going lower, variable rate mortgages often offer lower interest rates than fixed-rate mortgages. If rates are rising, however, variable-rate mortgages expose borrowers to higher interest rates.
Variable vs. fixed rate mortgages
With a variable rate, your interest rate can increase and decrease over the duration of your mortgage term. With a fixed rate, your interest rate never
changes. But even experts remain divided on which type is best given today’s low interest rate environment. Evaluate your financial profile and your risk appetite before deciding between variable and fixed rates.
Variable rate mortgages
A variable rate mortgage increases and decreases over the duration of your mortgage term as the prime rate of the mortgage lender goes up and down. Here’s an example: if a bank advertises a rate of prime -0.1% and the prime rate is 3%, your interest rate would be 2.9% at the start of your mortgage term. Variable mortgages are often referred to as ‘floating’ — they rise and fall throughout the length of the term based on current economic conditions.
Fixed rate mortgages
With a fixed rate mortgage, your interest rate doesn’t change over the length of your mortgage term. Fixed rate mortgages offer a certain level of comfort and security: you’ll know exactly what your payments will be each month for the entire duration of your mortgage term.
What’s a prime rate?
The benchmark interest rate banks and other types of lenders use when offering variable rate loans. Prime is directly influenced by the Bank of Canada’s overnight lending rate and can change on a monthly basis. Changes in both the BoC’s overnight lending rate and the prime lending rate are determined by a host of economic factors including GDP growth, inflation, credit market conditions, and the unemployment rate.
So, should borrowers choose a variable or fixed rate?
Over the last 25 years, Canadians with variable rate mortgages have typically paid less interest than those who took a fixed rate. While variable rates may save you money over time, you need to be financially and psychologically prepared for your mortgage payments to rise during your mortgage term. If the prospect of paying an extra $200 per month on your mortgage keeps you up at night, variable rates may not be the right choice for you.
Open versus closed mortgages
Closed mortgages force you to pay a fixed amount of money every month, all the way until your amortization period is over. While these traditionally offer you a lower interest rate, you will be charged penalties if you pay off your mortgage faster than the amortization period. In contrast, open mortgages allow you to pay off a mortgage faster than the principal and interest payment every month, but because the bank will profit less in this case, these types of mortgages come with higher interest rates.
Open vs. closed mortgages
An open mortgage gives homeowners the flexibility to pay off their mortgage at any time. A closed mortgage is little more strict — if you pay it off before the mortgage term ends, you have to pay a penalty. So on top of choosing between variable and fixed rates, buyers also need to decide between open and closed mortgages.
Open mortgages give you the ultimate payment flexibility
The entire mortgage balance can be paid off at any time without penalty. But open mortgage rates are usually variable and a little higher. You’ll likely end up paying the prime rate plus a substantial premium.
Fortunately, you can always move into a regular fixed rate mortgage if you decide variable interest rates aren’t a good fit for you. That’s what makes an open mortgage so appealing – you can pay it off or move to another product at any time.
Closed mortgages offer attractive interest rates
Closed mortgages generally have lower interest rates than open mortgages do, but borrowers get limited flexibility: you can’t pay off the loan without incurring a penalty. Most closed mortgages allow for accelerated payments of some kind, but each lender sets it own prepayment terms. Some lenders will let you double up your scheduled mortgage payments or pay an annual lump sum.
Nonetheless, with a closed mortgage you’re essentially agreeing to keep the loan for the entire term. Borrowers who sell their house because of a relocation or job loss can end up with less money than they anticipated because high break fees gobble up their equity.
What about prepayment penalties?
Break fees are generally either the sum of three months of interest on your mortgage or the interest rate differential (IRD), whichever is greater.
The IRD is the difference between what you would have paid in interest and what the bank can now make on the funds they lent you, based on the current rates, for the remainder of your term.
If you were paying the bank 5% interest and they can now only lend the money out for 3%, you have to pay back the difference. Of course, the more months left on your term, the greater the IRD penalty because the difference in interest is incurred for a longer period of time.
The IRD usually only applies to fixed rate mortgages. Unfortunately, today’s falling fixed interest rate environment means borrowers are almost guaranteed to pay the IRD, and that’s often a nasty surprise to Canadians who failed to read the fine print of their mortgage contract.
What is a prepayment charge?
A prepayment charge is the cost you incur if you decide to break or renegotiate your mortgage terms before the term period is over. You may do this if you negotiated a fixed-rate mortgage, only to see mortgage rates subsequently tumble in the following years. You can also incur prepayment charges if you overpay a closed mortgage. Incurring these charges only make sense if you stand to financially benefit from them — such as if you negotiated a mortgage during a period of high interest rates, and negotiating a lower rate will save you thousands of dollars a year. Prepayment charges vary by lender and by loan.
How does the payment schedule work on a mortgage?
It’s pretty flexible. You can make payments once a month or as frequently as once a week. Of course, the more frequent your payments, the more you save on interest.
Schedule more payments to save on interest
Make frequent payments, like weekly or bi-weekly installments, instead of monthly payments. You’ll be able to reduce your principal quickly, saving you tens of thousands of dollars in interest over the life of your mortgage.
Take advantage of prepayment options
Use prepayment options to pay down your mortgage faster — with most mortgage terms, you can pay an extra 15% of the principal amount per year. The prepayment percentage is usually on the (larger) original principal amount rather than on the current amount you owe, which means you can whittle down your mortgage even more rapidly.
Prepayments are a great way to save on interest over time and a smart use of that year-end bonus or tax refund. So when you shop for mortgages, consider looking for one with competitive payment scheduling and prepayment options.
How large should your mortgage be?
There are two metrics of affordability that can help you determine how large of a mortgage you an afford. Based on the gross debt service ratio (GDS), the Canadian Mortgage and Housing Corp. recommends that your monthly housing costs should be no more than 32% of your gross monthly income. They also offer up another metric total debt service ratio (TDS), which takes into account all your loans and debt payments. Have a look at both below.
How do I qualify?
Qualifying for a mortgage means having a source of income, having a good credit score and the ability to service your future debt payments. In order to determine this, your bank or broker is going to want to see a lot of documents. Be prepared to bring proof of income such as pay stubs, proof of large assets such as cars, recent financial statements from your bank and of course, your credit score. Once the lender sees all your paperwork and is satisfied you’re a trustworthy borrower, your mortgage loan will be opened and ready to use.
Almost everyone has a credit score, and whether you know yours or not, it has a big impact on your life. Despite that, credit scores remain a mystery for a lot of people — what impacts them? How are they calculated? How can a score be improved?
We talked to Julie Kuzmic, senior product manager of Consumer Credit Scores at Equifax Canada, to get an expert take on everything you need to know about credit scores.
What exactly is a credit score?
Let’s get the basics out of the way. A credit score is a number used by financial institutions and lenders to quickly predict how likely someone is to repay their debt. The number ranges from 300 to 900 and the higher your score is, the better. Most people get this part.
Now here’s where things get tricky: you don’t have a credit score. You have several.
Credit scores are calculated using several different algorithms
Credit scores are calculated using complex algorithms and statistics by credit reporting bureaus. In Canada, there are two bureaus: TransUnion Canada and Equifax Canada. Kuzmic says that credit score algorithms are created by analyzing the credit files of millions of Canadians at a given point in time and comparing them to the same files several years later. By looking at the data in the files, they can see what indicators most accurately predict the behaviour of different segments of the population. After all, a freshly graduated high school student in a rural town and a young professional in Toronto are bound to have very different credit files, but they might still need to apply for a mortgage. That high school grad’s credit score is going to be calculated differently than the professional’s.
“The simplest explanation is that various components of the credit file may be weighted differently for certain custom uses of scores. However, ‘generic’ scores are most commonly used.”, says Kuzmic. This is why your TransUnion score and your Equifax score will be different. They use different algorithms and scales to do the same thing, but they’re different enough that you won’t get the same results. This is maybe the most important thing to remember about credit scores — there are lots of algorithms out there, not just one.
What affects your credit score?
A lot of people want to know what they can do to improve their credit score, and to do that, they need to know exactly what these credit bureaus are looking at when determining their score. Well, it’s actually just a handful of things that they look at in your credit file, according to Kuzmic.
Payment history. By and large, the most important indicator in your credit file is what your history of servicing your debt is. How much debt you have doesn’t matter so much as you have or how long it takes you to pay it off, as long as you have a long history of making your payments on time, most lenders see that as a good sign when making credit decisions.
Percentage utilization. How much of your available credit are you currently using? As a general rule, having a higher percentage makes it less likely for a consumer to be able to service new debt. Basically, if you had $5,000 in debt and a limit of $10,000, that 50% utilization doesn’t look as bad as someone who has $5,000 in debt with a $6,000 limit. So if you’re paying off multiple credit cards and start cancelling them as soon as you pay them off, you may actually be hurting your score.
Credit history. This refers to the length of time you’ve had a credit file. The longer your history of using credit is, the more accurate your score can be. There’s a minimum amount of credit activity someone has to have on their file before a score can be created. Things that determine credit history can range from applying for credit cards, loans, paying your cell phone bill, utilities, rent, and merchandise payment plans from stores.
Delinquency history. This is an important one. If you have a history of missed or late payments, your credit score is going to take some damage. Any unpaid debts that have gone to collections are the most damaging, because it will be years before they’re taken off.
Inquiries. How many credit products are you applying for? These are called hard inquiries and they’re the reason why you’ve heard that applying for credit cards or loans can hurt your score. This is technically true, but it doesn’t affect everyone, because like any other factor, the score algorithm weighs this data differently for different people. For some people, having a high number of inquiries won’t affect their score much at all. Also note that even though you will see how many times you’ve checked your score on your own report, those inquiries are left off the file for everyone else. That means soft inquiries don’t affect your score in any way.
What credit bureaus DON’T look at when determining your score
Credit scores are simply used to predict your behaviour and whether you will pay your debt, not whether or not you can. Credit files don’t include any info regarding your income, savings, or other assets.
You should check yours every year to ensure it’s accurate
Even though credit scores are proprietary, credit files are not. What’s more, you can get a free copy of your credit file at any time just by asking for one. It’s recommended that everyone check their credit reports from both TransUnion and Equifax every year to ensure the information is accurate. In many ways, this information is more useful than simply knowing one of your credit scores, but if you do want to get a good idea of where you stand, you can order a report, including your score, from either credit bureau for a fee or get a free score through a financial service like Borrowell.
The scores you’ll get are 100% legitimate credit scores. But because the score version you’re getting will likely be the “generic” score, it may not reflect the same score a financial institution would use to process your application for say, a business loan.
The one surefire way to improve your credit score
Don’t try to game the score. Just pay your loans on time and your score will be fine. This is why it’s important to always make sure you cover your minimum payments, no matter what.
Hopefully now you have a clear idea of what a credit score is and what affects it. Some people think there are “secret tricks” or other methods to ensure a good score. The reality is much simpler. Pay your debt and make sure your file is accurate, and your credit score will get better over time.
Should I get pre-approved?
Getting pre-approved for a mortgage can save you a lot of trouble. It will help you know right off the bat how expensive of a home you can afford. Having a pre-approved mortgage will also allow you to show any prospective buyers that you’re serious about buying a home — giving you a potential edge if something like a bidding war crops up.
4 Tips for getting a mortgage pre-approval
Mortgage pre-approvals are a great way to prepare for purchasing a home. Essentially, what a lender is trying to do with the pre-approval process is get a lot of their paperwork out of the way before you find the house of your dreams and want to immediately put in an offer. Before a bank, mortgage broker, or credit union can sign off on releasing your mortgage money to you, they have to do their homework.
The mortgage approval process can take a substantial amount of time, so you may want to take care of things before you start house hunting in order to avoid frustration when you want to pull the trigger on your offer to purchase. Pre-approvals are also a great way to lock in an advantageous interest rate for next three to four months. Best of all, you are not committed to choosing with a specific lender in any way just because you received a pre-approval from them.
If you decide getting a mortgage pre-approval makes sense for you, here are four ways to speed the process along:
1. Be prepared to photocopy and scan every important piece of paper that might be loosely tied to you in any way
I’m only slightly exaggerating here. Lenders might like to see (but are not limited to asking for) the following items as you are getting a mortgage:
Several types of identification.
Proof of income, including pay stubs, a letter from your employer, and/or a notice of assessment (tax documents). If you happen to be self-employed, be prepared for the fine-tooth comb to come out as the lender tries to establish your income.
Your current mortgage or rental documentation.
Proof of other large assets such as vehicles or secondary properties that the lender uses to try to establish your net worth.
Recent financial statements from all your bank accounts.
Statements of any debt you might have including credit cards, student loans, car payments, and other loans.
Documentation showing any long-term legal financial commitments such as child or spousal support payments.
2. Build a solid credit score
Check out these articles for more details on what exactly goes into a credit score and how you can improve yours. Ultimately, your credit score is like an adult report card on how you’ve handled various types of payments and credit. Your credit report is going to be important to the folks looking to lend you a large amount of money for a home purchase. The higher the credit score, the more quickly and efficiently you’re likely to be approved (aim for 700+ in an ideal world).
3. Become familiar with your Gross Debt Service Ratio (GDSR) and your Total Debt Service Ratio (TDSR)
Your lender wants to know how much debt you have versus how much income you make. The lender takes this information and figures out what the maximum mortgage payment you could make every month, after calculating in everything from your current debt payments to your new property taxes and maintenance costs.
The more you understand about these calculations the better off you will be in determining just how much house you can actually afford (hint: it’s probably less than your lender is willing to give you). Your mortgage pre-approval can help you “prove” your seriousness to sellers, and it provides a realistic idea of what to expect. Doing a bit of reading around your debt ratios can make other pre-approval terminology easier to understand as well.
4. Know how much down payment you can kick in
If you’re not even sure how much money you can afford to “put down” on a house, the lender might have more than a few questions. You need to have at least 5% of the house’s price ready to hand over before you can get a mortgage for the other 95%. It is also important to note that having over 20% of the agreed upon price allows you to avoid costly CMHC insurance that automatically adds to your purchase price if you have to pay it. Having less than a 20% down payment also makes you a bigger risk to the lender, so saving up as much as possible can really help speed along a mortgage pre-approval.
Before you begin house hunting, get an idea of where you stand by getting a mortgage pre-approval.
What’s a mortgage broker?
A mortgage broker is a licensed specialist that has access to multiple lenders, often buying bulk loans and securing discounted insurance rates as a result. This allows them to offer mortgages with more competitive rates than you might find walking into your local bank branch. Many of these loans themselves originate at the big banks, meaning they’re not any less liquid than what you would get at major lender.
Banks versus brokers
Should I get a mortgage from a broker or a bank?
The choice is yours, but it helps to understand both options. Brokers work with a variety of lenders to find you the best rate. Banks are always happy to work with new borrowers, but they may not give you their most competitive rate up front.
When to choose a bank
Taking a mortgage with your local bank lets you to consolidate all of your financial services (bank account, credit card, insurance, mortgage, etc.) with one institution. It’s a small, but not insignificant, advantage banks enjoy over brokers.
When to choose a broker
Canadian borrowers are increasingly using mortgage brokers to get the lowest rates on their home loan. Here are a few reasons why they’re choosing brokers:
Brokers have access to a wide network of lenders and can get more competitive rates than regular consumers can.
They usually have special relationships with the lenders they work with, and you get to enjoy the perks.
They process a lot of mortgages and can pass their volume discounts onto borrowers like you.
They have access to mortgage offers from Canada’s major banks, so you can still get bank rates from a broker.
Recent surveys from the latest Canadian Association of Accredited Mortgage Professionals (CAAMP) report show that brokers accounted for 55% of total mortgage principals in 2015.
The banks often advertise a certain mortgage rate that is available to their customers. While you can always try and negotiate, some banks may not offer you that luxury depending on circumstances such as your income and your credit score. Banks are certainly convenient, allowing you to manage your mortgage in the same place as your chequing account and credit card. You’re not likely to get the best rate without shopping around, however. And not shopping around can cost you tens or even hundreds of thousands of dollars in lost money over the lifetime of your mortgage.
Getting the best rate
Shopping around for your mortgage rate is key. The majority of Canadians still only consult one source (often their bank) when searching for a mortgage. But you’ll never get the best rate that way. Use tools like our rate comparison page to help you find the best mortgage rate for you.
Mortgage down payment
Your down payment can make a significant impact on how affordable your home is. Being smart with your down payment can save you a lot of money on your monthly mortgage payment. Here’s what you need to know.
What is a down payment?
Essentially, a down payment is the portion you put down towards the value of your home right up front. This payment is then supplemented by the amount someone is approved for with a mortgage.
What’s the minimum down payment rule in Canada?
In Canada, the minimum down payment someone must be able to make is calculated as a percentage of the home’s purchase price. Depending on how much that house costs, the minimum down payment amounts vary.
For the portion of a home’s purchase price below $500,000, the minimum down payment is 5%.
For the portion of a home’s purchase price from $500,000 to $999,999, the minimum down payment is 10%.
For homes valued $1 million or more, the minimum down payment must be 20%.
What’s the 20% rule?
The 20% rule is based on the CMHC rule that any mortgage taken out by someone with a down payment that’s less than 20% of their purchase price will be required to insure their mortgage with CMHC. These are called insured mortgages, and like all insurance policies, it comes with premiums. These premiums are a percentage of your home’s purchase price, but that percentage is determined by the size of your down payment. Typically, it’ll only be 1.80% – 3.60%, but that still adds thousands of dollars to the cost of your home. Use the CMHC calculator to determine your premium.
What’s an insured mortgage?
Mortgages come in all shapes and sizes. While you may be familiar with the more common mortgage terms, such as open, closed, variable, and fixed, there’s always more to uncover when it comes to mortgages.
One of the more confusing mortgage concepts is insurance. Not only can you get mortgage life insurance to protect your estate in case you die before paying off your loan, you can also purchase mortgage loan insurance, which protects the lender should you default on your mortgage. The latter type of coverage is what people are referring to when they talk about insured mortgages.
Mortgage insurance = CMHC insurance
In Canada, mortgage loan insurance is offered exclusively through the Canada Mortgage and Housing Corporation (CMHC). However, while the policy is paid by mortgage lenders, the cost is passed down to you, the consumer.
The insurance premium is a percentage of your home’s purchase price, but that percentage is determined by the size of your down payment. Typically, the percentage will fall between 1.80% – 3.60%. Fortunately, CMHC provides an easy-to-use calculator for determining your premium.
And while it may not look like much, those extra percentage points will cost you tens of thousands of dollars. You can choose to pay that all at once or add it to your monthly mortgage payments. However, premiums in Manitoba, Ontario, and Quebec are also subject to provincial sales tax, and that tax can’t be added to your loan amount, so prepare for that when considering your closing costs.
Are all mortgages insured?
No. Most lenders will require you to get mortgage loan insurance if you’re making a down payment that’s less than 20% of the home’s purchase price. This insurance is not available for homes with purchase prices of $1 million or more, and those properties require minimum down payments of 20%.
What are the mortgage rules that apply to insured mortgages?
Because insured mortgages make up a significant portion of the mortgage market, rules for these mortgages tend to have a big impact on buying power. In 2016, in an effort to rein in the housing market, the federal government made a few changes to the rules affecting insured mortgages.
These changes include the following:
Increasing the minimum down payment to 10% (up from 5%) on the portion of mortgages that exceed $500,000 but are less than $999,999.
Requiring homebuyers who are applying for a fixed mortgage with a term of 5 years or more to also qualify for the Bank of Canada’s posted rate, which is usually higher than the rate buyers are applying for.
More stringent rules for high-risk buyers
Should you get an insured mortgage?
Generally speaking, a bigger down payment is better, especially if you can pay 20% up front and avoid CMHC coverage. However, there are situations where saving up for a bigger down payment may actually cost you more. After all, insured mortgages are typically subject to lower interest rates and administrative fees as the insurance coverage lowers the lender’s risk.
Homeowners with energy efficient homes may qualify for a discount (up to 25%) on their CMHC premiums, reducing the financial impact of this insurance. Lastly, if you have high amounts of unsecured or high interest debt, it may be more economical to pay that off first, make a smaller down payment, and take the CMHC fee.
Note that because homes valued at $1 million or more require 20% down payments as a minimum, those high-value homes do not qualify for CMHC insurance.
How big should your down payment be?
Really, this question has a different answer for each individual. When considering how much to put down, you have to level with yourself and be realistic about how much money you have. Keep in mind there will be additional costs to cover apart from your down payment.
You also have to figure out whether it is a better financial decision for you to pay less up front and have to pay for the CMHC insurance, but offset it by relying on strong price appreciation, a lower mortgage rate, or by renting out part of the home and making the higher cost more affordable.
Taking advantage of tax credits
Filing your taxes change when you own a home, so it’s good to know what tax breaks are available to you. There aren’t an overwhelming number of tax credits for homeowners, but it can get a little tricky depending on how you plan to use your home. Here are some things to remember.
What is the First-time Home Buyers Plan and is it right for you?
If you’re looking for a way to boost your down payment and you have an RRSP, you can withdraw up to $25,000 from it in a single calendar year to help get you a home. You won’t need to pay taxes on the withdrawn money or pay interest on the money. You will, however, need to pay that money back within fifteen years.
The Home Buyer’s Plan (HBP)
Before you even own a home, it can affect your taxes, should you decide to use money from your RRSP as part of your down payment. The Home Buyer’s Plan lets you withdraw up to $25,000 per year to buy or build an eligible home from your RRSP without it affecting your taxable income. It also allows you to repay the amount you withdraw without any interest or penalties, as long as you do so within 15 years. You must begin repayment the second year after withdrawal. If you used the maximum amount, that means you’ll need to pay back $1,666.67 every tax year.
The HBP can be extremely convenient if you need funds to boost your down payment, but want to avoid expensive options such as a loan.
If you participate in the program, you will need to report your repayments on your income tax and benefit return. Read more about how to do that here.
First-time home buyers* can claim up to $5,000 for the purchase of an eligible home as long as:
The house is owned by you or your spouse/common-law partner
Purchasers have not lived in another home they owned in the year of acquisition or the previous four years
*Note that persons with disabilities are exempt from the first-time buyer requirement for this credit
Housing type eligibility is quite comprehensive with qualifying homes defined as:
- single-family houses
- semi-detached houses
- mobile homes
- condominium units
- apartments in duplexes, triplexes, fourplexes, or apartment buildings
This credit is available to buyers who intend to make their new house their (or their relation’s) primary place of residence. This applies to those who:
- Purchased a new house, constructed a new house, or substantially renovated a house. This includes housing on leased land with some exceptions if the lease is more than 20 years old or has the option to purchase
- Purchased shares in a co-operative housing complex
- Constructed or substantially renovated your home, either on your own or having hired professionals, as long as the fair market value of the home once completed is less than $450,000
For more information on differences between provinces, as well as help calculating your rebate or filling out the necessary documents, see the full guide here.
If you renovate your home to accommodate a senior (65 years or older) or person with disability (whether that person is you or your spouse), you may be able to claim the renovation as a medical expense for an additional tax credit.
Eligible renovations are considered any enduring alteration that is integral to the dwelling as a whole and:
- Allows a qualifying individual to access, or be more mobile/functional within the home
- Reduces risk of harm or injury to the qualifying individual
Note that goods or services provided by a family member of the qualifying person can’t be claimed with this credit. However if you perform the work yourself you can claim expenses for:
- building materials
- equipment rentals
- building plans
You can’t claim the cost of tools or the value of your labour. Other ineligible expenses include:
- financing costs for the qualifying renovation
- the cost of renovation incurred mainly to increase or maintain the value of the dwelling
- the cost of routine repair or maintenance of the accessibility upgrades
- amounts paid for household appliances
- the cost of housekeeping, security monitoring, gardening, outdoor maintenance, or similar services
If you happen to be moving for a job or for education purposes, you may be eligible to claim the cost of your move.
To qualify, you must be moving at least 40 kilometres closer to your new work or school:
- moved and established a new home to work or run a business at a new location; or
- moved to be a student in full-time attendance in a post-secondary school program
Businesses can claim all sorts of expenses on their tax returns, including those with home businesses. You can claim a portion of your mortgage and utilities as a business expense if you use part of your home for your business.
To do this, you’ll need to measure the square footage of your home office/business space, then calculate its percentage of the home’s total square footage. That percentage will be the amount you claim on your tax return.
Note that the amount you can deduct for home business expenses can’t be more than the business’s net income before deductions. Essentially, tax breaks can’t be used to turn an unprofitable business into a profitable one.
The house hunt
Do I need a real estate agent?
As a first time home buyer — yes, you probably do. Purchasing your first home is no simple task, and it’s in your best interest to have an expert in your corner who can help you every step of the way. Not only will they have exclusive access to listings you likely wouldn’t be able to find yourself, but they’ll also have the knowledge and expertise to help you navigate what will likely be the biggest and most complex purchase you ever make.
The right agent will have a wealth of knowledge about the current market, be a skilled negotiator and will ensure they’re finding you the best property to meet your needs. They’ll be there to provide an objective opinion when you need it, and ultimately will be able to make the process a lot less stressful for you.
But aren’t there real estate websites I can use myself?
If you do like to do things yourself, there are plenty of resources out there to help you in your house hunt. Sites like Zoocasa, RedPin, and BuzzBuzz Home all aggregate listings for you in one, easy-to-use place.
But remember, using a real estate agent and using sites like the ones listed above don’t have to be mutually exclusive. You can be working with an agent while also doing your own research — the more you know, the better.
How to pick a neighbourhood
Likely, if you’re looking for a home, you already know what municipality you want to live in based on your career, family, and friends. But how do you pick what neighbourhood you want to live in?
A great way to determine what neighbourhoods will be right for you is to come up with a list of needs and wants. This list will look different for everyone, but some things to consider are:
- Type of home you want
- Proximity to work
- Proximity to transit
- Access to schools and daycare
- Access to trails, parks and outdoor space
- Access to retail and grocery stores
- General walkability
- Overall safety
Prioritize this list and decide what are must-haves, and what are just nice-to-haves. Once you do this, you can start to narrow down which neighborhoods might be right for you and start looking for properties within them.
So, you found ‘the one’ — now what?
Well, with the help of your real estate agent and lawyer, you’ll need to put in your offer. If you’re lucky, the seller will accept it and you’ll be the proud new owner of your very first home!
But sadly, closing the deal isn’t always that easy — in hot markets there’s a good chance there could be a bidding war. A bidding war occurs when there are offers from multiple buyers, all competing to snag the property in question.
All prospective buyers will be blind to what others are offering, and the sellers can accept whichever offer they want — it doesn’t have to be the highest price, but could instead have more appealing conditions (or, in many cases, no conditions at all).
Often, to encourage multiple offers on a property, the selling agent of a property will indicate in the listing that offers should be submitted on a certain date in the hopes that a deadline will result in multiple offers. However, there is nothing stopping an interested buyer in submitting an offer at any time — these offers are sometimes called ‘bully offers’, as they’re meant to entice the seller to accept before they receive any other offers.
The selling agent is obligated to notify the seller of every offer they receive, though usually the seller will tell the buyer’s agent to have them wait until the specified time period. Ultimately, it is up to the seller to accept whatever offer they choose — and not surprisingly, it usually comes down to the highest price.
So, what should you do if you find yourself involved in a bidding war? Obviously, this situation can cause even the most level-headed buyers to make rash decisions that could end up being detrimental. Make sure that before you start your house hunt, you fully understand your limits and have a clearly defined maximum budget, as well as understand the impact that your maximum will have on your finances over the long term. Make sure when you do make your offer — you keep your emotions in check and bid logically.
The closing costs
The closing costs
Buying a house is a huge financial decision, and you’ll need to think beyond just mortgage payments and condo fees. You need to also make sure that you’re planning for all of the extra costs associated with homeownership.
Here are the most common closing and after-closing costs to be prepared for:
Home inspection fees
A home inspection is an in-person inspection of a home’s overall condition and structure. An inspector will examine all major elements of a home and indicate any potential issues, along with a ballpark of repair costs, if applicable.
Getting a home inspection is not legally required, though some lenders may require one. Most importantly, though, it could save you big money in the long run. Typically, home inspection costs will range from $300-$600, depending on the size and type of the home.
Land transfer taxes
Land transfer taxes are calculated based on the purchase price of the home, and will vary by province. Some cities (like Toronto) also have a municipal land transfer tax. As an example, if you were to purchase a $750,000 home in Toronto, your land transfer taxes would be $14,475.
The good news? First time home buyers may be eligible for a full or partial refund on land transfer taxes in some provinces. In our earlier example, as a first time buyer of a $750,000 home in Toronto, your rebate would be $7,725.
Legal fees and related expenses
Working with a real estate lawyer as soon as you’ve found a home that you want to put an offer on is important. Your lawyer will be able to help you in reviewing your offer and explaining it in plain terms, as well as with all of the legal work required on closing day.
You’ll need to pay for your lawyer’s time and expertise, as well as disbursements, which are any expenses they incur, such as registrations and supplies that are required. Legal fees and disbursement costs will vary, but you can expect to pay between $1,000-$2,500 in legal fees.
Don’t forget all these other little costs
…‘cause they’re not as “little” as you would have hoped. Housing prices and mortgage loans may dominate the home-buying conversation, but these other costs — often overlooked and not planned for in advance — can really add insult to injury.
Before you allow yourself to fall madly in love with a home, you may need to pay for an independent appraisal and get a lay of the land (a.k.a. the market value). An appraisal can cost $300-$500 depending on the property and it will give you a snapshot of the property’s current value — it’s also a factor your mortgage broker will consider before they offer you a loan.
Title insurance is meant to protect buyers against mortgage fraud, identity theft and forgery, and any other issues related to the home’s previous owners. While it’s not legally required, it’s a good idea to have it, and it will typically set you back $250-$350.
Property tax and utility adjustments
Based on when you’re buying your home, you may be required to reimburse the seller for any prepaid property taxes or utility bills that they’ve incurred. These fees will vary.
Tables and couches and beds — oh my! A 2015 study in the UK found that homeowners spend £15,215 on average to furnish their three-bedroom homes. Convert that to CAD, and the average is about $25,215. But that number moves up or down depending on the size of your home (e.g. one-bedroom condo versus two-bedroom townhouse) and your tastes (furniture to last a lifetime versus furniture you can live with).
Even more fees
Beyond the costs outlined above, there are several other fees to budget for when purchasing your first home. If you’re financing your home with a mortgage, most lenders will require that you have home insurance (and to be honest, it’s a very smart idea to have regardless).
You’ll also need to pay property taxes, which will vary based on where your home is located, and most lenders will allow you to bundle your property taxes in with your regular mortgage payments.
Also, keep in mind other fees that are likely to come up, such as moving expenses, utility bills and hook-up fees, furniture — and the list could probably go on.
Oh, and if you’re buying a pre-construction house or condo? You could be on the hook for even more fees — sometimes called ‘new-build fees’. You’ll have to pay the HST on your purchase, though you may be eligible for government rebates. New construction homes are also covered by a warranty program, and these fees could be incorporated into the purchase price or could be due at closing — make sure to find out which. There could also be enrollment fees and solicitors fees owed to the builder.