Hannah Logan
Buying a new home is equal parts exciting and daunting. After all, it’s probably going to be the largest purchase of your life and since it’s where you plan on living, it needs to fit your lifestyle. There are plenty of steps to buying a house in Canada and it might feel hard to know where to start. Here are 12 first-time home buyer tips to keep in mind no matter where you are in the process.
1. Save your down payment strategically
Putting a down payment on your home is required when financing with a mortgage. So, how much does that down payment need to be? The minimum requirements for a down payment in Canada are based on the price of the home.
| Purchase price | Minimum down payment required |
|---|---|
| Less than $500,000 | 5% of the purchase price |
| $500,000 to $999,999 | 5% of the purchase price for the first $500,000; 10% for the portion above $500,000 |
| $1 million or more | 20% of the purchase price |
Here are a couple of examples to put these requirements into context:
If you were to buy a house that was $450,000, your minimum required down payment would be 5%, or $22,500.
If you were to buy a home priced at $680,000 — the 2021 national average price as forecast by the Canadian Real Estate Association — you’d pay 5% on the first $500,000, or $25,000, plus 10% on the remaining $180,000 or $18,000. So the minimum required down payment on a $680,000 house would be $43,000.
As a first-time home buyer, saving the minimum required down payment amount is a great place to start. But know that there are pros and cons to putting down only the minimum. With a 5% down payment, you’ll have to pay mortgage insurance, for example, and you’ll start your home ownership journey without much home equity. On the other hand, it may not take as much time to save 5%, meaning you can become a homeowner sooner. And a smaller down payment may mean you can reserve some cash for moving costs or unexpected repairs.
Ultimately, deciding how much of a down payment you want to make will help you determine how much house you can afford.
» MORE: What is home equity?
2. Determine what you can afford to borrow
As a first-time home buyer, you might be surprised to learn that what you can afford and what a lender might approve you to borrow aren’t always the same number. Banks and other mortgage lenders look at several factors to determine how much money they’re willing to lend you for a home purchase. These include your income, credit score, credit history, debt service ratios, loan-to-value ratio, and the mortgage stress test — but there’s more to your full financial picture.
When deciding how much mortgage you can afford, you’ll want to consider all of the above plus closing costs, expenses not included in your debt service ratios, the cost of potential home repairs and improvements, and more. This can help you to arrive at a monthly mortgage payment, and thus total loan amount, that will be feasible even if your financial situation changes.
3. Work on your credit score
To get approved for the mortgage amount and interest rate you want, you’ll need a good credit score. Depending on your financial history, this might take a bit of work, so start paying attention to your score as early as you can. A few tips and tricks to build your credit score include:
- Finding and eliminating any errors on your credit report.
- Reducing or paying off any existing debt.
- Lowering your credit utilization ratio.
- Paying your bills in full and on time.
- Having different types of credit and keeping your oldest accounts in good standing.
» MORE: What you need to know about credit reports
4. Calculate your GDS/TDS
Lenders use your gross debt service ratio (GDS) and total debt service ratio (TDS) to see if your income is high enough for you to afford mortgage payments on top of any current debt you have. You typically need a GDS of 32% or less and a TDS of 40% or less to qualify for a mortgage. Knowing your GDS and TDS before applying for a mortgage will give you a good idea of how you’ll fare in the mortgage stress test — another hurdle to getting approved for a mortgage in Canada.
» MORE: Understanding debt service ratios
5. Practice for the mortgage stress test
Canadian lenders use the mortgage stress test to determine if you qualify for a loan, and at what amount. Don’t worry though, there is no studying involved. When considering your eligibility for a mortgage, lenders must use the minimum qualifying interest rate, which is usually higher than the rate on your mortgage contract. If you “pass” the mortgage stress test, it means you will likely be able to continue making your mortgage payments, even if interest rates were to increase. You can simulate the mortgage stress test to know where you stand before applying for a mortgage.
» MORE: How to pass the mortgage stress test
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6. Compare your mortgage options
In Canada, mortgage lenders are generally classified as either A lenders or B lenders.
A lenders are chartered banks and credit unions, which have the strictest mortgage qualification requirements. They usually lend to clients who are considered “prime” borrowers; those with a good credit score, solid credit history, and stable job.
B mortgage lenders are not as regulated or strict as A lenders, but they still have rules and requirements to follow. While it might be easier to get a mortgage with a B lender, they often charge higher interest rates.
You’ll also have to decide what kind of mortgage you want. Open or closed mortgage? Fixed-rate or variable-rate mortgage? Monthly or bi-weekly payments? A five-year term and 25-year amortization is common, but there are many other options available. Take your time and do your research to make sure you get the best rate and conditions possible.
Finally, you’ll also have to think about whether you want to apply for and negotiate a mortgage directly with the lender, like a bank, or work with a mortgage broker.
» MORE: Should you use a mortgage broker or a bank?
7. Get pre-approved before house-hunting
Getting pre-approved for a mortgage lets know the maximum amount you’re qualified to borrow, which can help you avoid shopping outside your budget. Depending on the lender, you maybe able to lock in the pre-approved interest rates for 60 to 130 days. Note that pre-approval is not a guarantee that you will get a mortgage for that rate. A lender can still refuse you a mortgage even if you have been pre-approved.
8. Investigate assistance programs
The government of Canada has several assistance programs to help first-timers reduce the costs of buying a home. It’s worth browsing through these to see if you qualify for tax credits and other assistance that can make homeownership more attainable. Some common programs include:
B.C. First-Time Home Buyers Guide
Alberta First-Time Home Buyers Guide
9. Zero-in on the right home type and location
Home prices can vary widely depending on the neighbourhood and type of house. Research your options and carefully weigh the pros and cons of each.
Condominium (or strata) housing might be cheaper than a freehold home, but it also includes monthly fees that must be taken into consideration, for example.
If you’re having trouble finding a home that meets your needs in your desired location, consider adjusting your “wants” by compromising on space or cosmetic issues, or think about trading a slightly longer commute for a different location where property values might be closer to your budget.
» MORE: Common types of houses in Canada
10. Use a real estate agent
Finding the right real estate agent can reduce your stress by guiding you through the home buying process, so don’t just hire the first one you come across. Take the time to read reviews online and ask for recommendations. When you do find someone of interest, interview them. Find our how much they know about your desired neighbourhood or the house type you are hoping to buy. You can even ask for references from former clients to get a sense of what it’s like to work with a particular agent.
11. Arrange a home inspection
It’s not required, but before you buy your home, it’s wise to have a home inspection. This is a professional evaluation to verify the safety and condition of the home. That way if there is anything wrong, you will know ahead of time and adjust your offer price accordingly rather than discovering a nasty surprise upon purchase.
» MORE: Home inspection checklist for buyers and sellers
12. Don’t forget about home insurance
Many lenders require that you show proof of home insurance before you can close on a mortgage. Home insurance covers certain types of loss, theft, and damage both indoors and outdoors, as well as damage or injury to anyone who is visiting your property. Insurance premiums and policy terms vary widely between providers, so be sure to shop around for a price and coverage that meets your needs.
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