Are you a first-time home buyer in Canada? Well, then this article is right for you.
Real estate investment is one of the most lucrative in the world. And as such, smart millennial’s now look to dive into home ownership for residential and long term investment purposes.
So if you’re one looking to make a purchase be it a condo, town home, or a house, the process of acquiring such properties can be complicated especially if you buy a house for the very first time.
Complicated? Sure but not impossible and considering there are lots of factors involved, you must have a lot of questions on your mind.
Buying a home in Canada isn’t just about getting a realtor and selecting the next available house on sale. So in this review, we will be discussing the advantages, factors to consider, and the necessary steps to take in buying the home that suits you best. Let’s get right into it!
Advantages Of Buying a Home
1. A Long term investment
An average person looking to buy or who owns a home considers it as an investment which is true.
The prices of homes increase with time and if used properly and lucky to sell when the market is hot, the return is extraordinary.
However, returns yielded from the sale of a house is usually below the stock market price in the same period except in rare situations.
2. Dignity of ownership
Only a few things are as satisfying as knowing you have a secured roof over your head.
So buying your first home brings a feeling of satisfaction, maturity, and even respect from society.
3. Discipline to make savings
As a homeowner, you are required to pay your monthly mortgage dues even when inconvenient.
Failure to make payments implies that you will have to lose your house which you don’t want. Therefore, home ownership instills discipline and make sure you save in your home.
4. Build capital
One of the primary advantages of owning a home is the ability to borrow against the equity in a house at a very good rate. This frees up capital to make other investments such as the stock market.
5. Revenue potential
Apart from the long term investment goal, having a home can also be a source of passive income for you.
Immediately after purchase, a part of the house such as the basement or a room can be rented out to earn some cash.
The house can also be rented out in the short term while you are on vacation. Services such as Airbnb has made this so simple to do.
The revenue amassed can then be used to either increase payment and reduce the period amortization or pay off the monthly mortgage payments.
Steps Involved in Buying a Home
As mentioned earlier buying a home is quite a complicated process but with this step by step process, you should have enough knowledge of what buying a home in Canada entails.
Step 1: Save up for a Down Payment and Additional fees
A down payment is basically the quantity of money you are looking to put down to buy a home and as such, you just don’t go about looking for a home without having a down payment
Planning for your down payment is an important aspect of your financial planning that should be executed before going into the market in search of a house.
And as you can expect, the chances of you getting a mortgage are dependent on the amount you’re looking to drop as a down payment.
Ways to save up for a down payment
There are various ways you can raise and save money for your down payment. These include;
Setting a savings goal and opening a high-interest savings account with a bank. Banks such as Tangerine and EQ Bank offer a high-interest rate.
Taking from your Registered Retirement Savings Plan (RRSP)
Monetary gifts from friends and family
Saving your tax refund
Minimum budget for the down payment
There isn’t a minimum budget requirement in the real sense as this is dependent on the purchase price of the home you intend to buy.
However, in Canada, a down payment between 5% and 20% of the home’s purchase price is expected to be made.
Please note that making a down payment that is lower than 20% comes with a cost as you will be required to pay a mortgage default insurance.
The mortgage default insurance ultimately is an extra add-on cost and so if you’re looking to waive that, you will have to make a down payment higher than 20%. The decision is yours really.
Step 2: Save up for Closing Costs
While saving up for the down payment, you should also keep in mind that there’s also a closing cost to pay. Most people are not aware of the closing cost which always comes as a surprise.
The closing cost can easily amount up to 1.5% to 4% of the home’s purchase price so it’s best to be prepared and save up for it.
The closing costs are administrative and legal expenses paid at the closing of the transaction. To avoid getting caught off guard, it’s best you plan for these costs ahead.
The closing cost is expected to cover fees such as:
1. Home Inspection Fees
This is not a compulsory fee to make however if you are a first-time buyer we recommend you pay this fee.
The house condition in terms of ventilation, structure, plumbing, and so on will be inspected.
2. Property Appraisal/Valuation Fees
Depending on your mortgage lender, you might have to pay this fee or not. This fee is paid to determine the worth of the property.
3. Property Survey Fee
This fee is paid to show a survey of the land’s boundaries and the positions of structures especially if there’s been a recent addition of structures.
4. Title Insurance fee
This offers coverage to likely problems that may come up after the purchase has been made.
Issues such as survey errors, title defects, zoning issues, encroachment issues, etc are covered.
5. Land Transfer Tax (LTT)
This fee is considered the second largest fee after that down payment. This fee is charged whenever you purchase a home.
However, the cost differs from one province to another and not all provinces make this payment.
6. Legal Fees
Getting a home requires you to file some legal paperwork and as such you will need a lawyer.
Your lawyer will have responsibilities such as sorting out insurance and carrying out a title search.
These costs including lawyer’s fees are charged separately.
7. Home Insurance Premium
Banks/lenders will always ask you to provide evidence of home insurance before funds are released to you.
Home insurance helps cover expenses incurred in changing your home. This is usually charged annually or monthly
Other closing costs include:
Estoppel Certificate Fee
PST/HST on Mortgage Default Insurance
Step 5: Draw up your Finances
Buying a home should not be a sudden decision. Lots of planning and decisions have to be made especially on finances.
Don’t forget that one of the biggest debts you can ever insure is a mortgage so carefully scheming ahead is important as it can make a huge difference.
Drawing up your finances before setting out to shop for a house will help you figure out how you can afford to spend.
Your financial planning should start by completing a detailed assessment of your personal finances. This is to make sure that you have everything ready before approaching a bank for a mortgage loan.
Step 6: Determine how much house you can afford
At this stage, you have to be completely honest with yourself and go for what you can actually afford once you’ve established your financial status.
You have to ask yourself if you can make the down payment and if it won’t be difficult to meet your monthly mortgage payments.
It will always be a bad idea to live from hand to mouth all for the sake of getting your dream home.
After much consideration, you can then proceed to the bank to request a mortgage.
Banks use two types of ratios to determine how much to lend you. These include;
1. Gross Debt Service Ratio (GDS)
This ratio is the combination of your housing costs incurred monthly.
This includes heating costs, mortgage payment, taxes and half of your condo fees if it applies. The housing costs are then divided by your total income earned monthly.
To stand a chance of securing the mortgage, your housing cost should be below 32% of your total income.
2. Total Debt Service Ratio (TDS)
Apart from the GDS ratio, banks also have a look at the TDS to have an estimate of what your debt size looks like monthly.
To calculate this, constant debt responsibilities such as child support, alimony credit card, student loan e.t.c are added together with your housing cost.
A TDS ratio of 40% less of your total monthly income will see you get your desired mortgage. This implies that if you’re earning a total income of $20,000 monthly, your debt obligations should be below $8,000.
Please note that other factors are also considered asides these two ratios. These factors include;
Credit score and history
Saved down payment
Features of property
Your credit score is used by banks/lenders to make an assessment of the risk they have to deal with in giving out credit to you.
Generally, the credit score ranges from 300 to 900 so how high or low your credit score determines your chance of getting the best mortgage rate.
A credit score of 680 and above will get you the best mortgage rate.
In the case where your credit score is low, there are steps you can take to give your credit score a boost.
The Score-Up consultation software can be used to analyze your credit score and also give advice on how to improve your points.
Generally, Banks/lenders will always offer to lend you more than enough money to spend on a home. This is why you should be honest with yourself and go for a home you can comfortably afford.
Step 7: Get the best mortgage rate
You can’t afford to leave everything to chances so it is crucial you do your own research when it comes to getting a mortgage.
Interest rates are always fluctuating and therefore differ from one lender to the next. This is why you must do some research to get the best mortgage rate available.
Types of Mortgages
No mortgage suits everyone so it’s best to look around and choose a type that suits your budget best.
Here’s an overview to help make your decision-making process easier.
1. Open and Closed Mortgages
“Open” and “Close” has to do with the level of flexibility affordable on your repayment.
An Open mortgage offers a more flexible repayment plan.
The Open mortgage can be paid either in full or part at any time before the end of the contract without attracting any penalty.
Closed mortgages are more rigid and offer restricted prepayment options. When it comes to Closed mortgages, additional mortgage prepayment is allowed but up to a specific percentage.
Generally, Closed mortgage is more popular and offered by lenders than Open mortgages. However, with the flexibility of Open mortgage comes a higher interest rate.
2. Low ratio and High ratio mortgages
The low ratio mortgage is also referred to as the conventional mortgage.
When you make a down payment that is more than 20% of the purchase price, your mortgage is known as a low ratio mortgage.
This further excludes you from acquiring a mortgage default insurance which is an extra cost to you.
Your mortgage is referred to as a high ratio mortgage when you make a down payment that is lower than 20% of the purchase price. With a high ratio mortgage, you will be required to acquire a mortgage default insurance.
3. Fixed and Variable rate mortgages
Getting a fixed rate implies that your interest rate on your mortgage is constant for a specific time period mostly within 1 and 5 years.
In Canada, the majority of the mortgages obtain is the fixed-rate mortgage and reports for 65% of all mortgages.
The variable rate mortgage offers much flexibility on the interest rate which is however determined by the prime rate set by the bank/lending institution.
The prime rate is usually a reflection of the rate set by the Bank of Canada which changes with time.
Mortgage repayment terms in Canada mostly run for a long period of time usually between 5 and 30 years. However, the longer terms, the higher the interest rate to be paid.
Step 8: Make an inquiry on incentives for first-time Home Buyer
This step is primarily for first-time buyers so if you’re not, you can skip to the next step.
As a first-time home buyer, one of the things you should look out for is saving cost on your purchase. And a very good way to do that is taking advantage of incentives for first-time homebuyers in Canada.
These incentives are;
1. RRSP Home Buyer’s Plan
This incentive enables first-time homebuyers to request funds from their RRSP.
If you’re single, you can request up to $25,000 and $50,000 as a couple. This incentive can be used to pay for your down payment.
2. First-Time Home Buyers’ (FTHB) Tax Credit
This incentive offers an income tax credit of $5,000 which is non-refundable.
The home must have been purchased after January 27, 2009, to qualify for this incentive.
3. GST/HST New Housing Rebate
This incentive makes sure qualified homeowners are paid back a percentage of the GST/HST paid on the purchase price for the house.
4. Land Transfer Tax Rebate
This incentive is available to first-time homebuyers in Ontario, British Columbia, Prince Edward Island and Toronto.
Reimbursement is issued on the land transfer tax paid in when purchasing the house.
Step 9: Start House-Hunting!
This is the most exciting step in the process of acquiring a home. With the lenders pre-approval at hand and the down payment saved in the bank, you can start shopping for a home.
The Canadian Multiple Listing Service (MLS) compiles a list of vacant real estate nationwide with a smooth filing system that filters in a number of ways such as size, price, location amenities, and so on.
I’ll recommend you work with a real estate agent in shopping for your home especially if you are a first time home buyer.
Expert information and a network of professionals are offered by these real estate agents to help form a solid team and ease stress.
Buying a home takes a lot of planning and executions. It’s always a difficult process to begin but it gets easier as you journey down into the adventure.
To become a homeowner, your finances must be figured out, exploit available saving alternatives, get pre-approved for a mortgage, employ a lawyer, real estate agents and other needed experts.
No doubt all these are overwhelming but it certainly worth being a homeowner. This review is certainly what will get you a step closer to becoming a homeowner.
Thanks for reading. Please share this article on social media and help spread the word. Do let me know your thoughts and comments below.
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Sagar Sridhar is an accomplished personal finance blogger hailing from Canada. With a unique blend of quirkiness and enthusiasm, he has established himself as a prominent figure in the personal finance industry. Sagar’s passion for finance, coupled with his engaging writing style, sets him apart from his peers. While he has a background in computer engineering and a Master’s in Project Management, Sagar’s true passion lies in helping others manage their money. His writing has been featured in several top Canadian finance publications, solidifying his status as a sought-after voice in the field. Despite juggling his work and blogging schedule, Sagar remains resolute in his mission to make a lasting impact on the personal finance world.