Many Canadians are looking to own their first home.  It is quite a complex and lengthy process – with many needing help knowing where to start.  As a first-time homebuyer, there are multiple factors to consider and many more ideas to understand before shopping for your first home.  In this simple guide, we seek to help you achieve your homeownership goal by understanding the critical steps in homebuying.

We’ll also cover the different incentives available to first-time buyers and how you’ll benefit from each.  This guide by no means guarantees that we have covered all that you’ll have to deal with on your journey – or that it’s detailed enough for you to consider it thoroughly. However, we hope you’ll see this as a starting point and seek other valuable advice from your mortgage professional.

---

Key Takeaways

• Knowledge is vital for first-time homebuyers traversing the homeownership journey.
• Qualifying mortgage payment is much higher than the actual mortgage payment.
• Multiple first-time homebuyer programs exist to lower the cost of purchasing your home.

What Are The Criteria For First-time Homebuyers In Canada?

To be qualified as a first-time homebuyer (FTHB), you must not have owned or lived in a home owned by your current spouse/common-law partner for the previous 4 years before January of this year. You can still be an FTHB if you rent for 4 years or your relationship ends. 

The federal government will consider you an FTHB again for mortgage default insurance, withdrawing from your RRSP through the Homebuyers Plan (HBP) for your primary property, or spousal buyout with an insured mortgage during a relationship breakup. However, you should expect a different definition of FTHB from the provincial government regarding the land transfer tax rebate you receive, primarily if you or your spouse have owned a property before.

Important: The definitions for various incentives and programmes vary between the provinces, so you must seek professional legal advice if there is any opacity in confirming if you qualify as an FTHB.

Everything First-Time Buyers Need To Know About Mortgages

In this section, we’ll cover mortgage and financing fundamentals. It goes without saying that when making inquiries about perhaps the most significant investment you’ll ever make, there is no such thing as a stupid question. 

A question that seems silly to you may help you make a crucial decision or avoid unseen risks. By understanding each piece of the puzzle, you’ll leave no stone unturned and get the understanding you need to make educated decisions.

What Is A Mortgage?

A mortgage is a loan that can be used to purchase property, which acts as security for the loan. The definition of a mortgage translated directly from its origin in French is “death pledge.” However, mortgage rates are much more affordable than back in the day when this definition was hatched – this large sum of money can now be paid off within 25 or 30 years instead of a lifetime.

There are two main types of residential mortgage charges in Canada, regardless of the property or industry name. Their names rest on how they are registered against the property’s title.  These two are aptly named – standard charge mortgage and collateral charge mortgage.

Your lender registers a standard charge on the mortgaged property, creating a legal claim, with details registered at the land registry office as contract rate and specific terms/conditions – this is also known as conventional or conventional charge mortgage. “Conventional mortgage” refers specifically to a mortgage without high-ratio insurance.

Your lender registers a collateral charge mortgage against the property for an amount exceeding the mortgage balance, securing all indebtedness, including mortgage and other debts. 

What You Should Know About First-Time Buyer Downpayments

What Is A Downpayment?

The downpayment is the amount of money you put towards purchasing your home, net of closing costs and any debts you won’t pay off before your mortgage is funded. The lender will check your savings after considering loan or credit card balances. 

A positive net worth reduces the risk for both you and the lender when you apply for your mortgage and helps when making budget and cashflow changes. The loan-to-value (LTV) ratio and whether you need mortgage default insurance depends on your down payment size, and it’s a critical factor in mortgage rate pricing for insured or insurable lending criteria.

How Much Downpayment Do You Need To Make On A House?

You qualify for the best mortgage rate with 5% down (on the first $500,000 purchase price and 10% beyond). A 20% or more downpayment won’t give you the best rate. You need to put down 35% or more to get a slightly better rate than with 20%, but still not as good as with less than 20%. A lower mortgage rate means you can qualify for more with a lower stress-tested mortgage payment than a higher rate.

Is The 20% Rule Always Needed?

A 20% downpayment is only required if you’re purchasing a property valued over $1 million or want to start with a 30-year mortgage amortization.  Otherwise, a 20% downpayment is not a requirement unless your credit is bruised or you’re purchasing an investment property. 

Avoid delaying your homeownership goals by striving to save a 20% downpayment. Inflation and investment returns are unpredictable, and delaying can make it harder to qualify for a mortgage. Canada’s housing market expects surging long-term growth as the housing supply remains limited in the country. 

The government has discouraged demand by tightening qualifications, which puts demand pressure, and prices will continue to surge. 20% down on today’s average property may not even be 15% on the same property next year.

Pre-Approval Process

Supply is diminishing literally as you read, so let’s prepare to make your move –  and start your homebuying journey on the right foot.  It’s best to assess your financial situation and determine your ability to qualify.  When looking at qualifying, you’re looking at what mortgage amount you can carry, considering your downpayment and the rates available to you. 

One of the biggest reasons for thoroughly reviewing your financial situation during your homebuying journey is to make you only make offers on properties that your income can debt service.  If you make an offer on a property and it’s accepted but can’t get approved for a mortgage, you could lose your deposit – or, worse, get sued by the seller.

Step 1: Application

Complete an application as a pre-approval.  

A pre-approval is not the same as an approval; a pre-approval is done before you find a prospective property.  This means that property details are not required when completing a pre-approval application.  At this stage, you’re just looking to see how much mortgage you can qualify for.  

You notice I did not use the word approval – as there is no approval. For now, everything is tentative, including that once you find your property, it may not meet your lender’s guidelines, which the lender will cover in disclosure during this process. 

Step 2: Get Advice

This step is straightforward – your mortgage expert will pre-emptively review your application and have questions to understand your financial situation thoroughly. 

Remember that the expert doesn’t know you or your financial situation, so if you speak frankly and truthfully, they’ll be able to impart advice that will help you – or, worst case, could save you from financial duress. Be truthful and ask questions if they use mortgage industry jargons you don’t understand. Don’t be a rate shopper.  It doesn’t matter what the lowest rate is, what your neighbour got from their bank, or that you’ve saved over $1 million in your bank account.  

Mortgage rates are personalized to factors related to your purchase and creditworthiness.

Step 3: Verify and Confirm

In this stage, you’ll simply need to validate your information (address, identity, income) with documentation (IDs, paystubs, letter of employment). The documents you’ll be asked to provide may vary depending on what you disclose about your financial circumstances to your mortgage expert or lender’s representative. 

You may need to provide a separation agreement if you are separated.  But this is not a requirement from someone who may be single.  It’s important to be forthcoming about your financial details so your mortgage expert can set your expectations and gather the correct information. 

You wouldn’t want to say you don’t have any obligations outside your credit bureau but have a large amount of money coming out from your account every month. At some point, the lender will question and investigate this debit on your bank account. Thus putting your approval in jeopardy at the last minute.

Step 4: Underwriting

Underwriting is when a credit analyst validates and reviews your credit file. 

• They first review to ensure your information is valid as presented. Then they will update the details to ensure you qualify on the correct qualifying criteria based on your request.  
• Then they will confirm one of three things on your file: that you’re pre-approved for the amount you request, pre-approved for a different amount (most possible), or both if you requested a lesser amount than what you requested could be qualified for.
  • The underwriting department is required to address anything that has not been addressed on your documents, credit bureau or income by your mortgage expert’s file submission notes.  
  • They will look for fraud and inconsistencies, but mainly, they act as the gatekeeper for the lender – a second pair of eyes to ensure nothing is missed.

Step 5: Pre-approval Letter

Once the lender is satisfied and you’ve qualified for a potential mortgage amount, you’ll be provided with a pre-approval (with a rate hold) or pre-qualification (without a rate hold) letter that your mortgage expert will review with you so that you understand the limitations. 

This letter will indicate the qualifying amount and some disclosures to protect the client in case you purchase a non-conforming property.

Fixed Versus Variable Rates

Fixed Rate Mortgages

A fixed-rate mortgage is one in which a borrower’s interest rate remains unchanged over the entire mortgage term. Lenders’ fixed mortgage rates are closely tied to the price of five-year government bonds. 

As bond yields rise, the value of the bonds decreases, and banks compensate for this loss by increasing the rates on their fixed-rate mortgages. Conversely, banks’ fixed mortgage rates tend to fall when bond yields drop. 

Updates to fixed-rate pricing applies on newly funded mortgages, but once your mortgage closes, you won’t have to worry about changes until you come up for renewal at the end of your mortgage term. 

Variable Rate Mortgages

A variable mortgage is one in which the rate can fluctuate with changes in the lender’s prime rate. When you commit to your mortgage, your variable rate is based on a static discount from your lender’s prime rate. Lenders’ prime rates are based on the Bank of Canada’s target for the overnight policy rate, also known as the benchmark rate. When the Bank of Canada (BoC) updates its policy rate – lenders’ prime rates move in the same direction.

Choosing a fixed rate for your first mortgage is an excellent idea so you can get used to the significant monthly obligations of owning a home.  Having a fixed mortgage allows you to budget confidently, knowing what your cashflow looks like from month to month – at least over your term.  Although not at the moment, choosing a variable rate comes with advantages, too; if rates fall, you will benefit immediately from the savings. However, if rates increase, then your mortgage payment could be adjusted, or your amortization could increase if it is not.

Mortgage Term

Your mortgage term is how long your mortgage agreement and rate are valid. Mortgage terms can range from 6 months to 10 years, with 5 years being the most popular in Canada. The correct term for you depends on your borrowing needs.

Your mortgage is divided into principal and interest components, with interest calculated based on amortization and payments determined by dividing both components over the payment period. 

Shorter-term interest rates are gaining popularity, benefiting borrowers as they remain priced lower. Longer terms are generally preferred as they provide FTHBs more time to adjust to a new budget. The lowest rate may only sometimes be the best option for your financial plans. Consider more than just the lowest rate when choosing your mortgage term.

Amortization 

As an FTHB, your choice of amortization period is the easiest you’ll make on your homebuying journey. On the prime lending side, the amortization period cannot exceed 30yrs. The maximum allowable amortization is 25 years on mortgages with less than a 20% downpayment. You can exceed 25-year amortization with a downpayment of 20% or more. 

The longer the amortization, the lower your mortgage payment. The shorter your amortization period, the more money you save on interest over the term or life of the loan. The difference between two identical mortgages with different amortization is the higher interest-carrying cost for the extended time the money is lent out.

Open Versus Closed Mortgages

The type of loan you choose can provide big savings your interest-carrying costs if your financial situation allows you to become mortgage free faster. An open mortgage allows unlimited prepayments without penalty but usually has a much higher interest rate. Most mortgages are closed, restricting prepayment privileges. HELOCs (home equity line of credit) also allow unlimited prepayment but with the ability to re-advance once paid down.  

What’s a prepayment?   Prepayments are lump sum payments on your mortgage principal after your mortgage is funded. They both directly reduce your principal mortgage amount owing at any given time. Being able to prepay your mortgage may not be considered if you’ve used your savings towards your downpayment.

However, if you expect a windfall and want to pay down your mortgage, an open mortgage may be a good fit, but it’s always best to consult a mortgage expert. A collateral charge mortgage can also be helpful, allowing for a smaller open mortgage (or HELOC) with a higher interest rate and a larger closed mortgage with a lower rate.

Benefits Of Mortgage Default Insurance For FTHBs

Mortgage default insurance, also known as high ratio insurance or CMHC insurance, is a mortgage that protects the lender in the event of default. Default means that the borrower has stopped and can no longer continue making payments on their loan or mortgage.  This takes a default risk off the table for the lender. 

Either the government takes on this risk by having its crown corporation, Canada Mortgage and Housing Corporation (CMHC), or one of Canada’s private mortgage default insurers, Canada Guaranty or Sagen (formerly Genworth) will, ensure the borrower against defaulting on their mortgage. 

Default insurance is available only on purchasing a primary residence valued under $1 million and bought through prime lending mortgage financing (following government rules and guidelines). The borrower is charged between 2.8% to 4% of the mortgage amount when their downpayment exceeds 20% of the purchase price. Default insurance can be added to the mortgage balance upon qualification. 

Default insurance cost affects mortgage interest rates, with lowest mortgage rates offered when the mortgage is default-insured. And the next best rate with a downpayment of 35% or greater. When the downpayment exceeds 20%, the lender will cover the cost of the default insurance, and the premium will not be added to the borrower’s mortgage amount.

Mortgage default insurance has benefits. It helps many Canadians qualify for homeownership and build their equity sooner by accessing the lowest rates. Eligibility requirements, such as minimum credit score needed to qualify, are lower when your mortgage is default insured, making qualifying easier. The insurance will stay intact until the mortgage is paid out or refinanced. You should review options and do a cost analysis with multiple options that work for your financial situation. Applying for a 19% downpayment and paying the premium in cash could save you thousands of dollars in interest-carrying costs over the life of your mortgage.

The Stress Test Rate Is Not Your Actual Mortgage Rate

A mortgage stress test assesses whether you can afford mortgage payments during interest rate increases, which can fluctuate over your mortgage term. The stress test is a government requirement for lenders to assess borrowers’ risk. All mortgages must be stress tested using a benchmark rate (federal qualifying rate) or the contract rate plus 2%. 

The test calculates a mortgage payment at a rate 2% higher than the borrower’s contract rate and limits gross income to 39% of the borrower’s gross household income. 

The easiest way to calculate your mortgage stress test is to add 2% to your rate and compare it with the benchmark rate.

You can check out nesto’s best 5-year variable rate or best 5-year fixed rate, then add 2% to your rate choice to get your higher stress test rate.

• The Bank of Canada Benchmark Rate, currently 5.25%, or
• Your mortgage interest rate + 2%

For example, if you’re choosing nesto’s fixed rate, which today (as of May 3, 2023) is 4.39%, and you match the LTV limitations for this rate, then calculate your mortgage qualifying (stress test) rate as: 4.39% + 2% = 6.39%.

Now simply input the rate into our mortgage calculator to calculate your stress test monthly payment for your desired mortgage amount.  You’ll be qualified if your gross debt-to-income ratio (GDS) is below 39% with less than 20% downpayment or below 35% with 20% or more downpayment.

Working With Lenders Directly Or Mortgage Brokers

Mortgage lenders have different channels, some with branches and brokers that offer their services and others that are direct to customers to avoid commission payments. Knowing which channel you’re working with is essential, as mortgage rate pricing varies due to sales compensation. It’s also crucial that a banking officer is a generalist and they do not specialize in mortgages.

A qualified mortgage professional specializing in mortgages can provide knowledge through the application process. They can be called various names depending on the province they are registered in, but the exact educational requirements apply and are provincially regulated. For simplicity, we’ll continue to refer to them as mortgage experts – not to be confused with a bank branch representative who is a generalist. Some provinces, such as Quebec, have more rigorous education and regulations to protect consumer interests.

Shopping for the best lender or mortgage expert you wish to work with will be the best. You should ask about their level of knowledge and experience with mortgages.  If your mortgage expert comes with these two values, you can expect more support and fewer delays throughout your homebuying journey.

Understanding Mortgage Rates As A First-Time Homebuyer

One of the biggest mistakes you can make is only looking at the mortgage interest rate when getting a mortgage. Sometimes the lowest rate isn’t always your best choice, especially if you plan to move in a few years. If you end up locking into a low rate that doesn’t enable you to break the mortgage without paying a hefty penalty, then the low rate you selected upfront can cost you much more.

If possible, you’ll want to have the ability to change your payment frequency from a monthly mortgage payment, increase your mortgage payments or make lump-sum payments to help you pay off your mortgage faster. Even if you don’t think you’ll be making extra payments, remember that every bit helps, so it’s best to have this prepayment option just in case. Be sure to find out the amount you can prepay annually without facing penalties.

Predicting the future and knowing exactly how long you’ll remain in your home is tough. What happens if you decide to move from your current home to a new one before your mortgage term ends? In this case, you’ll want to ‘take your mortgage. In other words, transfer it to your new home. This is known as a portable mortgage. 

Important: Sometimes, the lowest interest rate isn’t always your best choice, especially if you plan to move in a few years. If you lock into a low rate that doesn’t enable you to break the mortgage without paying a significant penalty, then the low rate you selected upfront can cost you much more.

Closing Costs And Other Critical Costs For First-Time Buyers To Consider

Although you’ll have to set aside money towards your downpayment, it’s also best to consider your closing costs. These costs related to your home’s purchase are in excess of your downpayment.  Closing costs cannot be gifted and are a factor in your approval, so be sure to review and consider them as a much needed part of preparing for your homebuying journey. You must typically allocate between 1.5% to 4% of the home’s price. 

Consideration	Approximate Value	Details
Deposit	$5,000 to $50,000 (depending on the purchase price)	The deposit is the portion of your downpayment which you give to the selling realtor’s brokerage account in trust when your purchase offer is accepted.  When you close with your solicitor, this money will count towards your downpayment amount. Keep a copy and the receipt from the seller’s realtor.
Appraisal	$300 to $500	An appraisal may not be required – if it is, then the lender or insurer will cover it, depending on your downpayment. This requirement may also depend on the property’s location, age and purchase price. If you ask the lender to cover it, it may affect your mortgage rate, so be sure to check.
Land Transfer Tax	% of purchase price	In some provinces and municipalities, there is a land transfer tax (various other names) calculated as a percentage of the purchase price of your home. First-time buyers in Ontario, British Columbia, Prince Edward Island, and the City of Toronto can benefit from a tax rebate.
Legal fees	$1,000 to $3,000	Your solicitor will complete the legal, due diligence to get the property’s title into your name. They represent both you and also the lender. The lender will communicate with your lawyer once the mortgage instructions are sent. Your fees should be around $1,500 on average but can range higher if extra due diligence is needed.
Title Insurance	$300	Title insurance protects your ownership of the new property, protecting title fraud and conveyance issues. Lenders or provinces may require it to be purchased to protect all stakeholders involved in your transaction liability issues related to the property or potable water source.  Title insurance is too underrated for its overall value to protect you – required or not – it’ll be the best $300 you spend towards closing costs.
Default Insurance	2.8% to 4% of the mortgage	This mandatory insurance on high-ratio mortgages protects your lender in case of default.  When mortgages are insured, they have access to better rates as the risk to lenders is reduced. The premium you pay is a percentage of your mortgage amount based on your loan-to-value ratio. Some may refer to this as CMHC insurance, which can be added to your mortgage.
PST	ON – 8% QC – 9% SK – 6%	This is the provincial sales tax (only applicable in some provinces) on mortgage default insurance. Although the mortgage default insurance premium can be added to your mortgage, the PST on it must be paid in cash to your solicitor.
GST/HST	6% to 13	GST/HST may apply if you buy or build a new home or condo. The GST or HST tax rate will depend on the province where the property is located and is based on the purchase price. Your solicitor will confirm and apply for the tax credit if you’re exempt.
Realtor Fees	2% to 5% of the selling price	The seller pays Realtor fees, and the selling agent usually splits it with the buying agent.  As someone who is purchasing a property, this is not a fee that you’ll have to consider; however, if you’re also selling and buying, you’ll need to consider this deduction on the selling price of your property.
Property Taxes	$$$	This could be a cost or a credit on your statement of adjustment. Property taxes are sometimes prorated. Your solicitor will request the final bill from the seller or municipality to adjust for any unpaid portion for the time you take ownership.
Utility Charges	$$$	This could be a cost or a credit on your statement of adjustment. Utilities such as gas or hydro are sometimes prorated. Your solicitor will request the final bill from the seller or utility company to adjust for any unpaid portion from the time you take ownership.
Home Inspection	$500 to $1,500	You should include a home inspection if you’re purchasing a house.  It’s not a requirement and even has less need if you’re purchasing a condo. The inspection could reveal structural or other costly issues with the property and help you negotiate a lower price. It’s also a great way to understand any repair costs before purchasing. The cost of this service will depend on the location and availability of the inspectors who service the location, as well as the thoroughness of the report.

Rebates & Incentives For First-Time Home Buyers

As a first-time home buyer, you must know the various programs available to offset homebuying costs and help fund your down payment, which is often one of the most challenging hurdles to home buying. 

Following are details about critical first-time home buyer programs that could save you money:

Name	Savings / Benefits	Details
First-Time Home Buyers Incentive (FTHBI)	Up to 5% or 10% of the purchase price	The FTHBI helps first-time homebuyers without adding to their financial burdens.  Eligible first-time homebuyers with the minimum down payment for an insured mortgage can apply to finance 5% to 10% more of their home purchase through a shared equity mortgage with the Government of Canada.  This programme is not offered through Sagen or Genworth and is restricted to being administered only through CMHC.
First-Time Home Buyers Tax Credit (HTBC)	Up to $1,500	The HBTC offers up to $10,000 non-refundable income tax credit on a qualifying home acquired during the year. The credit will provide up to $1,500 in federal tax relief for an eligible individual.
GST/HST New Housing Rebate (NHR)	$$$	The NHR provides a refund on the federal part of the GST or HST that you paid on the purchase price or cost of building your new house, on the cost of substantially renovating or building a significant addition to your existing property, or converting your non-residential property into a house.
Home Buyers’ Plan (HBP)	$35,000	The HBP programme allows you to withdraw up to $35,000 in a calendar year from your registered retirement savings plans (RRSPs) to buy or build a qualifying home.
Tax-Free First Home Savings Account (FHSA)	$40,000	The FHSA is a registered plan allowing prospective first-time homebuyers to save for their first home tax-free. You can save up to $8,000 annually to a maximum of $40,000 over 15 years.  If you do not purchase a home within 15 years, the money is transferrable tax-free into your eligible RRSP.   Contributions will reduce your taxable income in the year they are deposited into the FHSA.  If the money is withdrawn for any reason other than to purchase your first home, then you’ll be taxed at your marginal income tax rate for the year it is withdrawn.
Land Transfer Tax Rebate	ON – up to $4,000 BC – up to $8,000 PE – up to $2,000 TO –  up to $4,475 ML – up to $15,000	First-time buyers in Ontario, British Columbia, Prince Edward Island, and the City of Toronto can benefit from a tax rebate. The City of Montreal also has a similar programme but with many limitations and caveats.

Examples Of Income Needed To Secure Mortgages In Various Provinces

These examples show you the average prices of homes in Canada, Quebec, Ontario, British Columbia and Alberta and the income needed to qualify for a mortgage with a 20% and less than 20% downpayment.

Jurisdiction	Average Home Price	Gross Annual Income NeededInsured (less than 20% downpayment)	Gross Annual Income NeededUninsured (20% or more downpayment)
Canada	$686,371	$134,260	$149,847
Quebec	$471,460	$97,293	$108,579
Ontario	$881,946	$173,009	$193,094
British Columbia	$860,067	$185,956	$207,548
Alberta	$446,263	$90,281	$100,756

Frequently Asked Questions

Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions. 

Final Thoughts

Buying a home is one of the most important decisions anyone can make. Making the right decision takes careful consideration, research, and confidence. With the proper knowledge, you should ensure that you find your perfect home quickly and with minimal stress. 

Our first-time homebuyer’s guide has provided you with insight and knowledge to embark on your journey stress-free. Understanding mortgages, benefits and savings programs will take you closer to achieving your goals. 

If you need additional guidance, consider seeking advice from nesto’s commission-free mortgage experts. Our mortgage experts are here to help guide you through this milestone in becoming a homeowner. At nesto, we wish to support each step of this rewarding journey!

---

Other articles in this guide: “First-Time Home Buyer Mortgage Guide”

• What is the First-Time Home Buyers’ Tax Credit?
• What is the RRSP Home Buyers’ Plan (HBP)?
• First-Time Home Buyer Land Transfer Tax Rebates Across Canada
• First-Time Home Buyer Programs in Canada
• First-Time Home Buyer Grants in Canada
• First-Time Home Buyer Loans in Canada
• Who Can Benefit From the Home Buyers’ Tax Credit (HBTC)?

---