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Published August 2, 2021
Updated October 4, 2021

First-Time Home Buyer Guide

Learn first-time home buyer strategies for saving a down payment, deciding what you can afford, applying for a mortgage, finding government help and more.

Buying your first home is one of life’s most exhilarating and exhausting experiences. Here are some tips and considerations to ensure you can successfully navigate your home-buying adventure.

Are you ready to be a first-time home buyer?

Deciding to be a homeowner can be one of the biggest decisions you’ll ever make so it’s important to carefully and honestly assess whether you’re ready to buy a home. Pressure from property-owning friends or FOMO are not the right reasons to buy a house.

When deciding if home ownership is for you, consider your financial stability, your capacity to juggle all the new responsibilities that a home entails, what you’re willing to sacrifice to own a home (vacations, eating out, etc.) and how good you are at managing debt.

What can you afford?

While many of us would love a home with lots of space and amenities, it’s important to be realistic and keep your home aspirations in line with your income.

» FIND OUT: How much mortgage can I afford?

According to the Canada Mortgage and Housing Corporation (CMHC), your monthly housing costs should not exceed more than 32% of your average before-tax monthly income. This is called your gross debt service (GDS) ratio.

You can figure out what your GDS ratio is by using this calculation: Total housing costs / Gross family income x 100

Housing costs include things like mortgage payments, heating, 50% of condo fees (if applicable), and property taxes.

Furthermore, the CMHC advises that a person’s entire monthly debt load should not exceed more than 40% of their gross monthly income. This percentage is known as your total debt service (TDS) ratio.

Figure out your TDS ratio with this calculation: (Total housing costs + other debt payments) / Gross family income x 100

In other words, your debt load includes your mortgage, property taxes, heat, 50% of any condo fees, as well as all your other debt payments, including for credit card debt or other loans.

Canadian mortgage lenders calculate and use your GDS and TDS ratios to decide if you qualify for a mortgage and what amount they will loan you. Note that there is a bit of wiggle room with what percentage lenders will accept, and you can still qualify for a mortgage even though your GDS and TDS ratios are higher than those set by the CHMC.

Keep in mind that when you’re deciding whether you can afford to buy your first home, it’s not just the mortgage costs and down payment that you need to consider. You’ll also have to factor in the expenses of managing a home, such as basic maintenance, utilities, property taxes and more. When it comes to home maintenance, experts say you should expect to spend anywhere from 2% to 5% of the value of your home on maintenance each year.

Down payment

To buy a house in Canada, you’re required to have a minimum down payment of at least 5% of the purchase price for homes of $500,000 or less. For homes that cost more than $500,000, you will need a minimum down payment of 5% for the first $500,000 and at least 10% for the remaining portion of the purchase price. Homes that cost $1 million or more require a down payment of at least 20%.

» MORE: Don’t forget closing costs

Tips for getting your first mortgage

Start saving your down payment early

Even if you’re not planning to buy a home for several years, there are benefits to getting a jump on your down payment savings.

Unless you have enough cash to buy a house outright, you’re going to need to secure a mortgage. In Canada, if you don’t have a down payment of at least 20% of a home’s value you’ll also have to get mortgage loan insurance through a provider such as CMHC.

The insurance protects financial institutions if home buyers default on their mortgage. Premiums are factored into your mortgage payments, so the smaller your down payment, the greater the premiums — and hence the higher your mortgage payments overall.

Starting to save for a down payment even before you have firm plans to buy your first home could mean avoiding mortgage insurance and enjoying a smaller monthly payment — not to mention more home equity.

» MORE: How does mortgage interest work?

Know your credit score

Your credit score is a reliable indicator of your overall financial health. Potential mortgage lenders will look at your credit score when deciding whether to give you a mortgage and at what interest rates.

Knowing your score will help you decide if you should wait to buy a home and instead do what you can to build your score first. Note that for mortgage insurance the CHMC requires that the minimum credit score of at least one of the borrowers is 680.

Ensure you can pass the stress test

To qualify for a mortgage in Canada, home buyers must pass the mortgage stress test. The test was introduced in 2018 to ensure that buyers could afford to maintain their mortgage payments if interest payments were to rise.

All potential borrowers, no matter what down payment they are making, must show they can afford mortgage payments based on their contracted mortgage interest rate plus 2%, or 5.25%, whichever is higher.

So, for example, if the bank is offering you a rate of 2%, you would still have to prove you could afford to make monthly mortgage payments if interest rates rose to 5.25%.

Research different types of mortgages

Do you want a fixed (locked in) or variable (changeable) rate of interest? Do you prefer a closed (can’t pay a mortgage back early without penalty) or an open mortgage (can be paid off at any time)? How long of a mortgage term do you feel comfortable with?

Compare lenders and get pre-approved

It’s important to take the time to compare qualification requirements, loan options, interest rates and fees across multiple types of lenders before choosing a mortgage. You might consider the options offered by a traditional bank, a credit union and an online-only bank, for instance. Comparing lenders will help you understand your options and ensure you get a mortgage that meets your needs at a competitive price.

Getting pre-approved for a mortgage is helpful because it gives you a realistic idea of what you can afford to spend on a home. You can apply for pre-approval with several lenders to compare their offers; getting pre-approved does not hold you to a specific lender.

  • FAQs

    • Who qualifies as a first-time home buyer?

      Generally, you are considered a first-time home buyer if in the past four years you did not occupy a home owned by you, or by your current spouse or common-law partner.

      Qualifications can vary, however, so be sure to check each plan’s requirements. For example, there may be exceptions for those who are disabled, are helping a relative with a disability, or are experiencing divorce.

    • What’s the best mortgage for a first-time home buyer?

      A five-year fixed-rate mortgage is the most popular mortgage type in Canada and is generally considered a good choice for most first-time buyers because it offers predictable manageable payments.

      The popularity of the five-year fixed term also means it is offered by most lenders, so there’s lots of choices available for you to find the best rate.

    • Is there any help available for first-time home buyers?

      The Canadian government offers a variety of national programs to help those who are buying their first home, including the following:

About the Author

Sandra MacGregor
Sandra MacGregor

Sandra MacGregor has been writing about personal finance, investing and credit cards for over a decade. Her work has appeared in a variety of publications like the New York Times, the UK Telegraph, the Washington Post, Forbes.com and the Toronto Star. You can follow her on Twitter at @MacgregorWrites.

DIVE EVEN DEEPER

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