Figure out how much you can afford for a home
Homeownership can be very exciting, but it isn’t always the best thing for everyone. Before you decide to buy a home, make sure you’ve carefully considered the costs.
According to Canada Mortgage and Housing Corporation (CMHC), your monthly housing costs, such as mortgage payments and utilities, shouldn’t be more than about 30% of your gross monthly income. For example, if your gross monthly income is $3,500, limit your housing costs to $1,050.
Also, your entire monthly debt load, including your mortgage payments and all your other debts, shouldn’t be more than 40% of your gross monthly income.
Saving for your home
To buy a home, you’ll need a down payment. You’ll also need money to pay for the upfront costs.
Make saving part of your monthly budget. Most employers will deposit your pay directly into your chequing or savings account. You’ll find it easier to reach your saving goals if you set up automatic transfers to a savings or investment account each pay cheque. Use this tool to find a bank account that suits your needs.
Saving with a TFSA
A TFSA (Tax-Free Savings Account) is an account that lets you save or invest your money tax-free. You won’t pay tax on money you withdraw from your TFSA, and you can use your TFSA savings to help you buy a home.
Saving with a RRSP
A RRSP (Registered Retirement Savings Plan) is an account that allows you to save money for your retirement and delay paying taxes on it. You don’t pay taxes on your savings until you withdraw money from the RRSP.
Using savings and investment
If you plan to buy a home in the near future, focus on building your savings. You’ll want to keep your money protected and easily accessible.
Short-term savings and investment options may include:
- savings accounts
- short-term GICs (guaranteed investment certificates)
- low-risk mutual funds
Ask your financial institution or advisor about the short-term investments they offer and how they work.
The Home Buyers’ Plan
This plan allows first-time homebuyers to withdraw up to $25,000 from their RRSPs tax-free to put toward buying your first home.
Paying for your home
Most people need to borrow to buy a home but you’ll need to put some of your own money into the purchase.
When you buy a home, you must put a certain amount of money toward the purchase upfront. This is called a “down payment”. Your mortgage loan will cover the rest of the price.
A mortgage is likely the biggest loan you’ll get in your lifetime so it’s important that you understand the process.
Check your credit report before you apply for a mortgage
A potential lender will consider your credit history before deciding whether or not to approve you for a mortgage.
Before you start shopping around for a mortgage:
Shop around for a mortgage
Lenders may have different interest rates and conditions for similar mortgages. Talk to several lenders to find the best mortgage for your needs. You can get a mortgage from:
Mortgage lenders – These lend money directly to you. Be sure to explore the different types of lenders that are available, including banks and credit unions and the mortgages they offer.
Mortgage brokers – They don’t lend money directly to you. Mortgage brokers arrange transactions by finding a lender for you. Since brokers have access to a number of lenders, they may give you a wider range of mortgages and terms to choose from. Mortgage brokers are paid a commission by the institution that provides the loan, so there’s no cost to you.
Get the mortgage that meets your needs
Mortgages have different features to meet different needs. It’s important that you understand the options and features on offer.
- do you want a mortgage with a fixed interest rate or one that can rise or fall
- how long of a term do you want
- how often would you like to make payments toward your mortgage
Mortgage loan insurance
If your down payment is less than 20% of the price of your home, you need to purchase mortgage loan insurance. In some cases, you may need to get mortgage loan insurance even if you have a 20% down payment.
Mortgage loan insurance protects the mortgage lender in case you’re not able to make your mortgage payments. It does not protect you. Mortgage loan insurance is also sometimes called mortgage default insurance.
Tax credits for homebuyers
The Government of Canada offers two tax credits for specific types of homebuyers. Your provincial or territorial government may also offer other home-buying incentives.
The Home buyers’ amount
You’ll get access to this tax credit once you’ve purchased your first home and submitted a tax return. This tax credit is an effective means of offsetting some of the upfront costs associated with buying a home, such as legal fees and land transfer taxes. Eligible homebuyers may receive a tax credit of up to $750.
GST/HST housing rebates
Generally speaking, sales of new homes are subject to the GST/HST; however, you may qualify for a rebate for some of the tax you paid if you meet certain requirements.
If you move into a new home to work or run a business in a new location, you can deduct eligible moving expenses from the employment or self-employment income that you earn in the new location.
Home buying costs
When you buy a home, you’ll have to pay for upfront costs in addition to your mortgage. These are called closing costs. You can expect to spend between 1.5% and 4% of the home’s purchase price on closing costs. You usually pay these costs by the time the sale is completed or “closes”.
You’ll have to pay legal fees on your closing day. This is the day that your home purchase is complete. These fees are usually at least $500 but will vary depending on your lawyer’s rates.
A lawyer can help protect your legal interests. For example, a lawyer will make sure that the home you want to buy does not have a lien against it. A lien is a legal claim over another person’s property that someone files to ensure a debt gets paid.
A lawyer will also review all contracts before you sign them, as well as your offer or agreement to purchase.
You must have home insurance in place as a condition of getting a mortgage.
Home insurance can help protect your home and its contents in case of theft, loss or damage to the inside and outside of your home or property.
Before the sale closes, you’re required to pay to register your property’s title under your name. This may be called a “land transfer tax,” a “deed registration fee,” a “tariff” or a “property purchases tax.”
The cost is a percentage of the home’s purchase price; for example, if your land transfer tax is 1.5% and your home cost $300,000, you’ll pay $4,500.
The seller of the home you’re buying may be entitled to “adjustments.” For example, if the seller has already paid the property tax on the home past the purchase closing date, the seller will receive a credit on the closing date. You must then pay this credit amount to cover the money already paid by the seller.
New build GST/HST
Generally, if you buy a “new build” home, you’ll have to pay GST or HST. Some builders include the HST in their sale price while others don’t, make sure to check. Otherwise, you’ll have to pay this cost upfront on closing day.
Other closing costs may include
- Interest adjustments (for the period between your purchase date and your first mortgage payment)
- Survey or Certificate of Location cost
- Estoppel certificate (for condominium units)
- Township or municipal levies (may apply to new homes in subdivisions)
- Mortgage default insurance premium (if paying premium up front instead of adding it to mortgage loan)
- Provincial sales tax on premiums for mortgage default insurance (applicable in some provinces)
Other home-buying costs
Other potential costs you may need to budget for include:
Mortgage lenders may ask you to have an appraisal done as part of the mortgage approval process.
For a fee, an appraiser provides a professional opinion about the market value of the home you want to buy. An appraisal fee is generally between $250 and $350.
A home inspector provides a comprehensive visual inspection of a home’s overall structure, major systems and components such as:
- electrical and plumbing systems
- the foundation
- the roof
CMHC recommends that you include a home inspection as a condition when you make an offer to buy a home.
Before moving in, you may also have to pay for:
- moving costs
- storage costs
- real estate costs for selling your home (if applicable)
- redirecting mail
Once you move in, you may immediately face other costs, including:
- utility hook-up fees
- basic furniture and appliances
- painting and cleaning
- water tests
- septic tank tests (if applicable)
Working with a real estate agent
Using a realtor is optional. A realtor will typically search for homes, negotiate a purchase price, fill out and file paperwork, and more.
The seller normally pays the realtor’s fees when you buy a home.
Home buying and newcomers to Canada
Canada Mortgage and Housing Corporation has comprehensive information on housing for newcomers, including:
Buying a condominium
Condominiums, or condos, are shared properties that contain individual housing units. Each unit has its own owner. Owners share the common areas outside of the unit such as the lobby and parking lot.
There are pros and cons to owning a condo. For example, if you buy a condominium or condo, you’ll have to pay monthly condo fees. However, you may like the idea of sharing the building maintenance costs with the other unit owners.
Buying to rent
If you buy a property with the intention of renting it out, keep in mind that you’ll have to declare your rental income at tax time each year.
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