Home Buying #Featured articles

How to Buy a Home in Canada

How to Buy a Home in Canada

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    Homeownership is a milestone for many Canadians, providing housing stability and long-term investment potential. However, home buying can seem nearly impossible with high housing prices and mortgage rates, especially for first-time buyers. This guide breaks down each step to help you navigate the process of buying a home, from initial planning to finalizing the purchase.


    Key Takeaways

    • Preparing to buy a home involves assessing your financial readiness.
    • Securing a mortgage requires a downpayment, a good credit score, and meeting income requirements.
    • Grants and incentives are available to first-time buyers to help make homeownership more affordable.

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    Are You Ready to Buy a Home?

    Buying a home is one of the biggest financial commitments you’ll make. Consider your financial stability, future goals, and the responsibilities of homeownership to see if you’re truly prepared. You must also assess whether you are financially ready to purchase a home. This includes a review of your credit score, whether you have a sufficient downpayment saved, and the income needed to qualify for a mortgage. 

    Homeownership comes with many ongoing expenses in addition to your regular mortgage payments, such as property taxes, condo fees (if applicable), ongoing maintenance, and the potential for unexpected repairs or replacements. A steady income to cover mortgage payments and healthy savings left over after your downpayment to cover any additional costs that might arise once you are a homeowner. 

    Saving for a Downpayment

    Before considering the long-term costs and ongoing expenses of homeownership, you must assess your savings to determine what you have available as a downpayment. In Canada, downpayment requirements vary based on the home’s purchase price. Currently, the downpayment requirements are as follows: 

    • A minimum of 5% for homes valued at $500,000 or less
    • For properties between $500,000.01 and $1,499,999.99, 5% of the first $500,000 and 10% of the remaining portion is required.
    • For homes valued at $1.5 million or more, a 20% down payment is required.

    For example, if you want to purchase a home for $600,000, you will require a minimum downpayment of $35,000. 

    $500,000 x 5% = $25,000

    $100,000 x 10% =  $10,000 

    $25,000 + $10,000 = $35,000

    Regardless of the purchase price, a larger downpayment of 20% or more can help you avoid mortgage default insurance premiums. To avoid paying default insurance, you would need a downpayment of $120,000 ($600,000 x 20%) to purchase the same $600,000 home. 

    Income Requirements

    The income required to purchase a home will depend on several variables, including your debt load, whether you require mortgage default insurance, current interest rates and property prices in your location. Typically, you can afford 3x to 4x your income as a mortgage when you put down 20% as a downpayment.

    Lenders will use gross debt service (GDS) and total debt service (TDS) debt service ratios to assess if you have the financial means to repay a mortgage. The less debt you have compared to your income, the lower your debt service ratios, and the more likely you will be approved for a mortgage. Typically, lenders will accept a maximum GDS of 32% for uninsured or 39% for insured/insurable mortgages and a maximum TDS of 40% for uninsured and 44% for insured/insurable mortgages. 

    Interest rates will impact the income required for your mortgage. Higher rates erode your purchasing power, meaning you can afford less as a mortgage or need a higher income when rates are high. Lower rates do the opposite, increasing your purchasing power, which means you can afford more or don’t require as high of an income to qualify. 

    The mortgage stress test will also impact the income needed for a mortgage, as you must qualify using a higher interest rate to ensure you can afford mortgage payments should interest rates increase. 

    If added to your mortgage, mortgage default insurance can also impact affordability and income requirements. If you plan to put down less than 20% and include the default insurance premiums as part of your mortgage, this will increase the principal balance, requiring a higher income to qualify.

    Credit Score

    Your credit score is one important factor that lenders consider when determining whether you are likely to repay a mortgage. The higher your credit score, the better your chances of being approved for a mortgage. A higher credit score can also help you secure a lower interest rate in some cases. 

    Getting Organized: Documentation and Finances

    When applying for a mortgage preapproval or prequalification, you will require documentation that proves your income and financial stability. The documents required may vary by lender and province. They will include recent pay stubs, T4s, notice of assessment (NOA), letter of employment, any other proof of income, and government-issued identification. 

    You will also need proof of your downpayment through savings or investment statements that show the funds have been in the account for at least 90 days. If the funds were gifted, you will also require a gift letter. Organizing your documents ahead of time will help with a quicker and more enjoyable mortgage application process.

    This is also an excellent time to reduce your debts since you must disclose all debts you currently carry (car loans, student loans, credit cards, lines of credit, etc.) when applying for a mortgage. Reducing your debts will help to improve your debt service ratios, making it more likely a lender will approve your mortgage application. 

    Check for First-Time Buyer Programs and Incentives

    Canada offers several programs and incentives to make homebuying more affordable. Availability and specifics of these programs can vary by province and municipality, so it’s essential to research what’s available in your area. Common programs include:

    • Home Buyer’s Plan: Withdraw up to $60,000 from your RRSP tax-free.
    • First Home Savings Account (FHSA): Contribute up to $8,000 annually ($40,000 lifetime) to use toward buying your first home tax-free. Gains within the account are tax-exempt, similar to a TFSA. 
    • Land Transfer Tax Rebates: Some provinces and municipalities provide first-time buyers a rebate on all or a portion of the land transfer tax payable.
    • First-Time Home Buyers’ Tax Credit (HBTC): Claim up to $10,000 for an income tax credit of up to $1,500.
    • GST/HST New Housing Rebate: A rebate on the GST or HST for newly built homes.

    These incentives, especially when combined, can provide significant savings. It’s also a good idea to check your local municipality for area-specific programs, as many regions have additional grants, incentives, and rebates for first-time buyers.

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    Shop for the Best Mortgage Rate

    Finding the best mortgage rate and terms is crucial to minimizing the total costs you will pay over the mortgage term and the life of the loan. A mortgage expert can help by comparing mortgage offerings across multiple lenders, often helping you secure better rates than big banks offer directly.

    For example, if you qualified for a $600,000 mortgage and your big bank offers you a mortgage rate of 4.82%, while you could get a rate of 4.19% if you shopped around, this could save you approximately $18,103 in interest over a 5-year term. 

    Assuming your interest rate never changed over the 25-year amortization, shopping around for a better rate would save you approximately $63,054 over the life of the mortgage. This highlights the importance of working with an expert who can give you personalized advice tailored to your financial situation.

    4.19% 4.82%
    Principal Paid (5-year term) $75,961.46 $70,469.38
    Interest Paid (5-year term) $117,131.99 $135,234.89
    Total Cost $193,093.45 $205,704.27
    Interest Savings $18,102.90
    4.19% 4.82%
    Principal Paid (25 years) $600,000 $600,000
    Interest Paid (25 years) $365,467.26 $428,521.33
    Total Cost $965,467.26 $1,028,521.33
    Interest Savings $63,054.07

    Get Pre-Approved for a Mortgage

    If you haven’t accepted an offer on a home yet, getting a pre-approval or pre-qualification can help you understand how much home you can afford. Pre-qualifications are simpler, relying on self-reported data to give you an idea of how much you can afford to carry as a mortgage, and they do not come with a rate hold. A pre-approval requires more documentation to confirm your financial situation and will allow you to hold a rate with the lender for a set amount of time until you find a property. 

    Getting pre-qualified or pre-approved will help you understand: 

    • Maximum purchase price based on your income and debt
    • Estimated monthly payments based on your pre-approved rate
    • Rate lock (pre-approval only): This protects you from rising rates while you shop for a home.

    A pre-approval or pre-qualification also gives you a competitive edge, as sellers know you’re a serious buyer.

    However, pre-qualification or pre-approval does not guarantee that you will be approved for a mortgage. This is because your debt service ratios rely on the details of the property you purchase to determine if you can carry a mortgage on that property. Additionally, your chosen lender needs to evaluate the property details to ensure it meets your lender’s conditions for financing.

    Begin the Property Search

    Once you have a clear budget, you can focus on properties within your price range. Choosing a real estate agent at this stage will be extremely important not only to help you find properties within your budget but also to help you understand the local market and prepare for making an offer.

    • Choose the right real estate agent: Look for an agent with experience in your desired area and property type. Ask friends and family who have recently purchased a home for a referral to a local agent they used and liked working with. 
    • Make a list of “must-have” vs. “nice-to-have” features: Prioritizing features you can’t live without will help narrow your search. Consider the type of home you need now and what you might need in the immediate future.
    • Research neighbourhoods: Research local schools, amenities, and recent sale prices to find the right fit and prepare for your search.

    Make an Offer and Finalize Your Purchase

    Once you find the home you love, it’s time to make an offer. This process involves negotiation and, once an offer is accepted, several key steps:

    • Submit a deposit: When the offer is accepted, this deposit secures your offer and is applied to the purchase price.
    • Arrange a home inspection: This is a critical step to ensure no costly repairs are needed.
    • Engage a real estate lawyer: They’ll handle the paperwork, finalize the sale, and manage the title transfer.

    The closing timeframe varies, but once everything is finalized, you’ll receive your keys and officially become a homeowner.

    Frequently Asked Questions

    What is the minimum downpayment required in Canada?

    The minimum downpayment is 5% for homes up to and including $500,000. Homes between $500,000.01 and $1,499,999.99 require a 5% down payment on the first $500,000 and 10% on the remainder. For homes $1.5 million and over, a 20% down payment is required.

    How long does the homebuying process take in Canada?

    The process can take anywhere from a few months to a year or more, depending on your financial situation, the housing market, and how quickly you find the right property.

    Do I need a real estate agent to buy a house?

    While not mandatory, a real estate agent can be beneficial, especially for first-time buyers. They provide market insights, help you narrow your search, assist with paperwork, and negotiate on your behalf.

    What are closing costs, and how much should I budget for them?

    Closing costs typically range from 1.5% to 4% of the home’s purchase price and cover fees such as appraisals, land transfer tax, legal fees, title insurance, and inspections. If you purchase a home for $600,000, expect to set aside between $9,000 and $24,000 to cover closing costs.

    Can I use my RRSP for a home downpayment?

    You can withdraw up to $60,000 tax-free from your RRSP through the Home Buyer’s Plan (HBP). Couples can combine their RRSPs for a total of $120,000.

    Final Thoughts 

    Buying a home as a first-time buyer in Canada is a significant undertaking, but it’s achievable with careful planning and the right guidance. nesto’s team of mortgage experts is committed to supporting you every step of the way, from understanding your financial readiness to securing the best mortgage rates. Contact a nesto mortgage expert today and let us help you turn your dream of homeownership into a reality.


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