It’s no secret that having a good credit history is important when buying a home in Canada. But what if you don’t have one? Don’t worry – there are still ways for you to buy your dream home! In this…
June 10th, 2022 – The prime interest rate in Canada is currently sitting at 3.70%.
- A variable-rate loan, line of credit or mortgage floats with the prime rate. As the prime rate increases or decreases, the rate of interest you pay on your variable loan also moves in the same direction
- A breakdown of five key home buying steps: 1) Finding a home; 2) Securing financing; 3) Making an offer; 4) Home inspection process; and 5) Closing on a home
- There are several first-time home buyer incentives available to help you save money on your first home purchase
What is the prime interest rate?
The prime rate is the interest rate at which Canada’s major banks and lenders use to set interest rates for variable-rate loans and lines of credit, including variable-rate mortgages. A variable rate floats with the prime rate, unlike a fixed rate that remains the same throughout a mortgage or loan term. In other words, as the prime rate increases or decreases, the rate of interest you pay on your variable loan also increases or decreases in unison with prime.
Important: Although the prime rate and Bank of Canada (BoC) policy interest rate are not the same rate, prime rate is heavily influenced by the BoC rate.
How is a prime rate determined?
The prime rate is mainly influenced by the Bank of Canada (BoC) policy interest rate – also referred to as the overnight rate target. These rates are not the same but, when the BoC adjusts its overnight rate target, lenders will often follow suit by changing their prime rate within a few days.
The home buying process
Buying a home is an exciting time for many Canadians – especially when it’s your very first home. Sometimes you can feel like you’re receiving information overload, so it’s useful to have each step laid out for you to review as needed. See: Guide to Buying a Home in 2021
Following is a breakdown of five important steps in the home buying process:
- Finding a home. Once you’ve determined how much mortgage you can comfortably afford each month and then secured a preapproval, it’s time to start searching for a home. Be sure to enlist the services of a trusted local real estate professional who’s experienced in buying and selling homes in your area(s) of choice. As a home buyer, the services of a real estate agent are free. The seller pays commission to both the buyer’s and seller’s agent.
- Securing financing. Once you decide on a property to buy, it’s time to get your mortgage financing lined up. nesto will always secure the best rate for you upfront based on your specific needs.
- Making an offer. There’s no magic number of properties you should consider before deciding to make an offer on a house. The key is to view the right amount of homes that enable you to be confident in your decision to make an offer on one particular property. You real estate agent will suggest a reasonable offer price based on the asking price as well as other variables, including how much similar properties have been going for and how long it takes to sell in the area. In many cases, the seller will counter offer. But, in cases where there are multiple offers, you want to ensure your offer is high enough to entice the seller to work with you on an agreement. It’s important to make your offer conditional on such important aspects as securing financing and having a home inspection. These are two main conditions that can save you in the long run if you simply can’t secure financing in time or an inspection uncovers something majorly wrong with the home. (See: How to Make an Offer on a House)
- Home inspection process. A home inspection is an added level of protection in the home buying process that ensures you’re not getting stuck with a property that will turn into a money pit. The sole purpose of a home inspection is to reveal whether the building and its systems are in sound working order before you commit to buying a particular home. A professional inspector looks over the major components of the home and prepares a detailed report. If there are outstanding issues, the inspector will provide you with a schedule outlining the estimated costs and a timeline detailing when these repairs should be completed. (See: Home Inspection Fees and Services in Canada)
- Closing on a home. Before you receive the keys to your new home, there are a number of closing documents you’ll have to sign with your real estate lawyer. All closing fees are also due at this time. Closing costs range from lawyer fees and disbursements to covering prepaid utilities and taxes. They can add up quickly, so it’s best to set aside 5% of your purchase price to cover closing costs. They typically amount to anywhere from 3-5% of the home’s price, but it’s always in your best interest to save more money than you need. See: Closing Costs: What Are They and How Much Will You Pay?
Tip: Aim to set aside 5% of the home’s purchase price for closing costs. If you save too much, you can easily put the extra funds towards furnishing and decorating your new home.
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First-time home buyer considerations
As a first-time home buyer, it’s extremely important that you’re aware of the various programs available to offset home buying costs as well as help fund your down payment, which is often one of the toughest hurdles to home buying.
Tip: Be sure to pay attention on when each first-time home buyer incentive must be claimed so that you don’t miss out on important savings.
Following are details about four key first-time home buyer programs that could save you money:
- First-Time Home Buyers’ Tax Credit (HBTC). The HBTC is offered by the federal government to help offset closing costs associated with buying your first home. The HBTC allows you to claim $5,000 on your personal tax return, resulting in a maximum $750 rebate. You must apply to receive the credit on the tax return in the same year in which you purchase a home. See: Who Can Benefit From the Home Buyers’ Tax Credit (HBTC)?
- First-Time Home Buyers’ Land Transfer Tax Refund (LTTR). Land Transfer Tax is paid to the province (and the municipality, in Toronto) by the buyer of a property. In some provinces – Ontario, British Columbia and Prince Edward Island – and the City of Toronto, first-time home buyers are eligible for a refund of all or part of the Land Transfer Tax. See: Everything You Need to Know About the Land Transfer Tax
- Home Buyer’s Plan (HBP). Under the federal government’s HBP, you can withdraw up to $35,000 ($70,000 for a couple) from your RRSPs tax- and interest-free to buy or build a qualifying home for yourself or a related person with a disability. The only time you don’t have to be considered a first-time home buyer to take advantage of the HBP is if you have a disability or you’re helping a related person with a disability buy or build a home. You’re considered a first-time home buyer if you didn’t occupy a home that you or your current spouse or common-law partner owned in the past four years. See: What is the RRSP Home Buyers’ Plan (HBP)?
- GST/HST New Housing Rebate (NHR). If you’re purchasing a newly built home from a builder, or are custom-building your own home, you may qualify for a rebate of the provincial GST or federal part of the HST that you paid on the home. Details of the rebate vary by province. The new home rebate application in Ontario, for instance, must be filed within two years of the new home closing date. The maximum Ontario new housing rebate amount for owner-built houses depends on whether you paid the HST on your purchase of the land. The Ontario new housing rebate is limited to a maximum of $24,000 if you paid the HST on the purchase of the land, and $16,080 if you didn’t.
Other articles in this guide: “How to Choose a Mortgage Rate“
- Mortgage Terms in Canada
- Should I get a Fixed or Variable Mortgage Rate?
- Mortgage Prepayment
- Porting and Assuming Home Loans in Canada
- Skipping a Mortgage Payment
- What is a Cash Back Mortgage?
- What is a Collateral Charge Mortgage
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