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5 Must-Follow Tips for First Time Home Buyer in Canada

First time home buyers in canada

Purchasing your first home may be challenging, stressful, and intimidating without some advice. You need to become fluent in a completely new real estate lingo, comprehend every aspect of purchasing a home, and make sure you’ve planned for all necessary closing costs. Not to mention the stress of trying to find a house that you feel comfortable spending that much money on. However, things don’t have to be this way. If you start with the appropriate knowledge, purchasing your first home can be easy and straightforward.

You’re not the only one who has ever fantasized about owning a home in Canada. In reality, with a homeownership rate that has stayed around 67% for the majority of the past ten years, Canada has among the highest rates in the world.

Here is a quick primer on everything you need to know and be on the lookout for if you’re thinking about buying a property but aren’t sure where to start.

Understand the Down Payment Rules

Consider the process of purchasing a home like putting together a puzzle: There are many small parts that must all fit together, but the majority of the image comprises of three large pieces. None of the other parts of the puzzle really matter without those three major components.

Your down payment is one of those substantial pieces of the jigsaw.

The amount of money you have to pay upfront on a house is a down payment. Since you must make a down payment by law, it is unfortunately challenging to be authorized for a mortgage without one.

For residences under $500,000 and for any amount above $500,000, the CMHC (Canada Mortgage and Housing Corporation) mandates that you provide a down payment equivalent to at least 5% of the purchase price and 10% for any amount over $500,000. This means that, for example, a cash down payment of at least $10,000 is necessary if you wish to make an offer on a $200,000 house.

You must pay mortgage default insurance, which typically costs between 2% and 4%, if your down payment is between 5% and 19.99%. Thankfully, there are strategies for avoiding CMHC payments.

Know Your Credit Score

Your credit score is the second crucial component in the house purchase jigsaw. This affects both the mortgage’s interest rate and the lenders’ willingness to grant you a mortgage.

The good news is that getting a mortgage doesn’t require having a perfect credit score—far from it. 

Credit scores in Canada range from 300 to 900, and a minimum credit score of 680 is mandatory for approval of a mortgage by the majority of banks and lenders. It’s important to remember that this is just an estimate and there are certain other variables to determine your mortgage approval.

When you apply for a mortgage pre-approval, a bank or mortgage broker will be able to inform you what your credit score is.

Get Pre-Approval for a Mortgage

Getting pre-approved for a mortgage is the third important piece of the home-buying puzzle. Once you get pre-approval, you may start looking at available properties since you will be able to submit an offer.

Your bank or mortgage broker will evaluate your credit rating, income, and outstanding debts (such a car loan or school loan) throughout the pre-approval application process to determine how much they’re willing to pre-approve you for and what interest rates they’re able to provide.

To put it simply, lenders want to determine how much they believe you can afford in order to make sure you can pay your mortgage.

That implies that your ability to borrow money and your purchasing power are both impacted by your present monthly bills. For instance, a $500/month automobile loan could result in a $40,000 difference in the cost of your home. To be accepted for a larger mortgage, you might need to refinance or find a method to exit the loan.

Analyze Your Affording Power

You’ll get a general sense of what your maximum purchase price can be when you multiply your down payment by your pre-approval amount. Let’s imagine, for illustration’s sake, that you have $10,000 set away for a down payment and that a lender has granted you preapproval for a $200,000 mortgage. This implies that you might potentially offer up to $210,000.

Making an offer that fully utilizes your down payment and pre-approved mortgage amount is, however, uncommonly a smart move. Why? Because a number of factors, in addition to your down payment and mortgage approval, will affect what you can afford:

Your Pre-Approved Mortgage Amount is never Locked-in

Assuming the amount they were pre-approved for is fixed is one of the biggest misconceptions first-time homebuyers make. This is not at all the case. It is just the largest sum that your lender will loan you.

When you make an offer on a house, your lender will evaluate (and maybe even have the house appraised) to determine its value. They might reduce the mortgage amount they’re offering you for that specific home if they decide the property is worth less than what you’re offering.

You Have to Pay ALL Closing Costs

One further simple error first-time homebuyers make is failing to take closing costs into consideration. These costs include attorney’s fees (to complete legal paperwork), a home inspection (which is not necessary but is strongly advised), property and land transfer taxes, and property insurance (which you need in place for the first day you assume ownership).

The total cost of these extra expenses can run anywhere from a few hundred to a few thousand dollars, depending on your circumstances.

Limit Your Ongoing Expenses

You should also consider how much you can spend on a monthly basis. Your mortgage payments will rise as your loan balance does. Don’t overlook expenses like strata fees, special levies for large projects if you’re purchasing a condo or townhouse, home maintenance charges if you’re buying a house, and yearly property taxes when determining what you believe you can afford. For these additional costs, you’ll need to budget an extra few hundred dollars per month.

MOST Important: First Time Home Buyer Grants

The good news is that first-time homeowners in Canada have access to a wealth of financial assistance. Here’s a quick glance at how each programme can make it easier for you to buy your first home, albeit each one has specific qualifications and restrictions that must be met:

First Time Home Buyer Incentive

Through a shared equity mortgage, the Canadian government will fund 5–10% of the purchase price of your property under this federal initiative. You can use this money for your down payment. Click here for more details of First Time Home Buyer Incentives!

Home Buyers’ Tax Credit (HBTC)

The HBTC, also known as the Home Buyers’ Amount or Home Buyers Program, enables you to deduct $5,000 off your yearly federal taxes for the purchase of an eligible home. You receive a $750 tax rebate thanks to the 15% tax credit rate. In order to qualify for the tax credit:

  • The house must be a single-family, semi-detached, townhouse, mobile home, or condominium, either new or old.
  • The house serves as your primary dwelling.
  • The house must be listed as being yours (or your partner).
  • In the four years prior, you (or your partner) could not have lived in another property that you (or your partner) owned.
  • Within a year of the purchase, you had to have moved into the house.

Home Buyers’ Plan

This programme makes it simpler for first-time homebuyers to save for a down payment by enabling them to withdraw up to $35,000 tax-free from their RRSPs for the purpose of buying a home that qualifies. To know more about HBP, Click Here.

GST/HST New Housing Rebate 

This programme aids in covering the additional GST/HST expenses incurred when purchasing a newly built home (you don’t pay GST/HST on older homes). To learn more about the rebate and eligibility, click here.

Additionally, there are a few provincial programmes in place across the nation that lower some of the costs associated with purchasing your first home. Some of these can be utilized in addition to the aforementioned federal programmes.

There are many excellent reasons to purchase a home, but it’s important to note that renting might occasionally be more advantageous from a financial standpoint. Some people decide to rent instead of buy a property because of things like housing expenses, home upkeep costs, and the potential for a bad investment. So be sure to comprehend the advantages and disadvantages of renting versus owning before you take the path to homeownership too far.

Nevertheless, buying a home is typically regarded as a significant step toward ensuring your financial security and stability. As soon as you become a first time homeowner in Canada, you may start establishing your credit and accumulating equity with each mortgage payment. Additionally, you have greater power because you won’t have to worry about your landlord increasing the rent or not renewing the lease.

Frequently Asked Questions (FAQs)

How to know the mortgage amount I can be eligible for?
Purchasing a home may be very thrilling and emotionally charged. Therefore, it’s crucial to try to predict in advance what monthly mortgage payment you’ll feel comfortable making after you’re settled.
Don’t forget about additional house ownership costs like utilities, property taxes, and perhaps condo fees.
Giving you a maximum mortgage pre-approval amount from a mortgage broker or bank is one thing (often there are different approval maximums, at different rates). However, after you move into your new house, being able to comfortably afford your mortgage payment should also be a top priority.

How to get pre-approved for a mortgage in Canada?
Since getting pre-approved is free, it makes sense to compare prices. Make sure your credit score is in good standing because most lenders will perform a hard credit check as part of the procedure to evaluate your finances. It will only appear as one hard check on your credit file if you receive several credit inquiries from different lenders over a short period of time, usually between 14 and 45 days, thus the impact on your credit score is minimal.

To learn how much you’ll be accepted for and what interest rates they’re providing, get in touch with mortgage lenders. Alternatively, you might enlist the help of a mortgage broker, who will perform comparison shopping on your behalf. There are no fees because lenders pay brokers.

What are the benefits of Mortgage Pre-approval?
Amongst many, the most important benefits of mortgage pre-approval are the following:
– Identify your mortgage affordability
– Ability to do mortgage financial planning beforehand
– Lock-in you interest rate for 60-130 days
– Represent yourself as a serious buyer to lenders
– No financial or legal obligations

When is the best time to buy property in the Canada?
For this, you have to check the market trends and real estate news regularly. Check your budget and the ongoing prices. Whenever you feel it is right to proceed, you may proceed with the property purchase. This process is wise for homebuyers, but for the real estate business, you have to be on top of the market updates. Keep visiting this space to get the most accurate Canadian real estate market trends. If you are a first time home buyer in Canada, do some more research or take consultation from property experts.

What if I face shortage of funds for the housing I selected in Canada?
The most wise decision will be to hold on for a few more days until you manage to save the funds required, or wait for a decline in the prices of the housing you are willing to buy. But, if you are in a hurry, you can go for a mortgage. Consult with a financial organization who, based on your credit history, can lend you the amount you are falling short of. You can also go for a second mortgage if you already own a house in Canada. For expats or non-residents in Canada, there is the option of a First-time Home Buyer Incentive in Canada.

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Written by Samit Banerjee

With an engineering and management academic background, Samit is always in the pursuit of doing something creative. In his professional career since 2008, he worked with many leading brands and also was an integral part of various government projects and initiatives. Samit’s affection towards creativity and playing with words was unable to refrain his inclination towards copywriting and public relations. With more than a decade of experience in the domain, he loves to serve his readers with interesting columns on Real Estate, Success Stories and Motivational thoughts.

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