Like most big decisions, buying a house is a significant commitment.
Signing the papers and closing the deal is the tail end of the lengthy home-buying process. You must navigate several steps to buying a house in Canada before moving into your Home Sweet Home. It is a relatively simple process, but it helps if you know what to expect. Otherwise, a few pitfalls along the way may add unnecessary drama to what should be a straightforward decision.
An Overview of the Home-buying Process
First things first – Take a comprehensive look at your lifestyle and finances. You must consider buying a house only if you are financially stable and have the resources to pay for it for several years. You can narrow down the location – this will give you an approximate idea of the costs. Once you have a figure in mind, you calculate how much you can afford to pay upfront as a down payment. Look around for a pre-approved mortgage and get one that suits you best.
The next step is to contact a Real Estate Agent though you may decide to look for a house on your own. Make an offer when you see a property that fits your budget. If successful, ta-da, you can move into your dream home (after paying the closing costs).
This article will give you a better idea of what to expect when buying a house in Canada.
Are You Ready to Buy a House?
It can be very tempting to think you would rather buy a house than rent. While this is true in most cases, you must answer a few questions before you decide on home ownership.
Are you financially stable, with a regular income and/or savings?
Buying a house is a long-term commitment – Do you have the skills and resources to handle it?
Are you able to pay all the costs that come with being a homeowner?
Can you devote time to regular home maintenance and upkeep?
If you can successfully handle the responsibility, you have passed the first hurdle. If you have doubts or misgivings, you are better off renting for some more time until you gather the necessary resources to buy a house.
Getting Your Finances in Order
Now that you have decided to buy a house, you must first figure out how much you can afford to pay. This will significantly affect interest rates and the type of mortgage you can get.
And this is where a good credit score helps you get a good deal.
What is a Credit Score?
A credit score is a three-digit number between 300 and 900 based on your financial information. It shows the state of your personal finance and credit, how fiscally responsible you are, and how risky it would be to lend you money.
Ensure that you pay your bills on time and stay within credit limits. These include all credit accounts and financial obligations such as credit card balances, other lines of credit, cell phone accounts, retail department store accounts, car loans, student loans, finance company accounts, home equity loans and mortgage loans. Your payment history is the key to higher credit scores, helping you to borrow money, rent a home or get a car loan.
Mortgage lenders look for a minimum credit score of 600+ for an insured mortgage. It is vital to have a good credit report to prove your creditworthiness, or you may find your loan rejected.
In the Canadian mortgage system, the home buyer must pay a minimum sum upfront as a down payment with their own money, and a mortgage covers the rest of the price of the home.
The down payment is usually from your savings account, a registered retirement savings plan or a non-repayable loan from a family member. The sooner you start saving money for the down payment, the better it is for your finances. Generally, you can negotiate better interest rates and mortgages if you can afford a more significant down payment.
We shall discuss down payments in more detail later in this article.
Apart from down payments and mortgage payments, other expenses such as home inspection and appraisal fees, closing costs, legal costs, property taxes and registration costs, and insurance need to be factored in. All these additional costs are based on the property’s purchase price.
Estimating a Purchase Price
A clear idea of the type of property you are looking for and its location can help you get an estimate of the amounts involved. You can talk to a good real estate agent to help you understand the costs associated with different properties and locations.
Estimating a price helps you create a framework budget and decide whether you can afford a home.
Affordability and a Budget
It is now time to calculate how much you can afford to spend.
Your savings are generally earmarked for the down payment. In addition, affordability depends on your Gross Debt Service (GDS) Ratio, which is your annual housing-related expenses + debt expenses divided by your gross income. You must consider the additional monthly homeownership expenses and see if you are comfortable spending that amount.
The lump sum payment a homebuyer makes when buying a home is called a down payment. The down payment can be from your bank accounts or retirement savings, the sale of a property, or a non-repayable financial gift from a family member.
Typically, a homebuyer can pay only a part of the purchase price as a down payment, with the rest of the money made up by a mortgage. According to the Canadian mortgage system, you can only qualify for a mortgage with a minimum down payment of at least 5% of the purchase price.
How Much Down Payment Do You Need?
The down payment on a house in Canada is a percentage of the purchase price of your home. Simply speaking, the higher your home’s purchase price, the bigger the down payment size. If you’re self-employed or have a poor credit history, your lender may require a higher down payment.
The down payment is deducted from the purchase price of your home and will determine how much you need to borrow. A large down payment gets you a better interest rate and a smaller monthly mortgage payment. On the other hand, a small down payment affects interest rates and mortgage payments, with the additional costs of mortgage loan insurance, AKA mortgage default insurance.
Average Down Payment Across Canada
In 2021, the average down payment for a home in Canada ranged from about 22% in British Columbia to just below 15% in Quebec. With the average home price in Canada hovering around the $ 700,000 mark, this means a typical down payment is above $ 100,000. It is a good idea to set up a down payment fund as soon as possible, where you can save money exclusively to buy a house.
Canada Mortgage Loans
In the Canadian mortgage system, homebuyers pay a sum upfront as a down payment. A mortgage covers the rest of the home’s purchase price, and the homebuyer pays back the mortgage lender for years with interest.
Mortgage lenders use several factors to determine the loan amount, mortgage rates and payment details. Your assets, income, living expenses, and outstanding debts are verified. They also confirm that the property you buy meets their standards and that the selling price is at par with market value.
A mortgage broker can guide you through the mortgage financing process – they’ll check your credit report and income documentation and let you know how much mortgage you can afford.
If you pay a down payment of less than 20% of the home purchase price, you must purchase mortgage default insurance. As per CHMC regulations, mortgage insurance is available only for properties of up to $1,000,000.
Home buyers can pay a lower down payment amount, as mortgage lenders are more willing to accept a minimum down payment (as small as 5%) if you have mortgage default insurance from the Canada Mortgage and Housing Corporation. You can also qualify for a high-ratio mortgage, which generally has lower mortgage rates when compared to a non-insured mortgage.
A mortgage pre-approval is a written contract with a mortgage lender that lets you lock in a specific term and interest rate (for up to 120 days) and gives you an estimate of your mortgage limit. In most cases, if not all, you will need a mortgage pre-approval in hand before talking to real estate agents and house hunting.
Talk to a mortgage provider or a mortgage broker to get pre-approved for a mortgage. The mortgage lender can also guide you through the mortgage pre-approval process and ensure you get pre-approved for a mortgage – they’ll check your credit report, proof of income, savings and investment statements and let you know how much mortgage you can afford.
A pre-approval helps you to plan what your mortgage may look like, including how much you can afford to spend, the interest rate available to you and what your monthly payments look like.
A pre-approved mortgage isn’t a sure-shot guarantee of final approval, but it can help you narrow your search for a house, helping you make decisions about the home purchase price, neighbourhood and type. Once your offer is accepted, you’ll need to return to your mortgage lender to get the approval.
The Canadian government has several programs to help Canadians buy a house. Your real estate agent or mortgage broker can help you check whether you qualify for any tax credit or tax-free incentives.
The Home Buyer’s Plan – Allows you to withdraw up to $35,000 (tax-free) in a calendar year from your registered retirement savings plan.
The First-Time Home Buyer Incentive – Helps first-time homebuyers to finance a portion of their home purchase through a shared equity mortgage with the Government.
The Home Buyers’ Amount – Offers a $5,000 non-refundable income tax credit amount.
GST/HST New Housing Rebate, Canada Greener Homes and Rebates on Land Transfer Tax are other government-sponsored programs for home buyers.
And now, you can start looking for a house! Here, a clear picture of your needs and goals over the next several years can help you narrow down the choices. Be prepared to look at many properties before you decide on your next home.
Having a real estate lawyer or a good Realtor can go a long way in making your house-hunting easier. Their market experience is crucial – in a seller’s market, for example, a real estate agent can help you decide whether you can afford the selling price or look at other options.
Make a list of your housing needs and trust your real estate agent to help you find a good fit, whether a condo or a detached house.
The Right Choice
Once you decide on the property, make an offer to buy the house.
An offer to purchase is a legally binding contract between the buyer and the seller and sets the parameters of the real estate transaction. It includes the legal names of the parties involved in the transaction, a description of the property, appliances or furniture, excluded goods (fixtures), financial details, the closing date, etc.
Once your offer is accepted, you’ll pay 1-2% of the purchase price as a good-faith deposit and fill out your mortgage application with the mortgage brokers for approval.
A home inspection is mandatory as the mortgage lender will want to assess the property. The entire process, from making an offer to getting the house keys, can take 30-60 days.
Ensure that closing costs, including legal fees, property/ fire insurance, and land transfer tax, are paid before the closing date. Inform service providers and agencies such as your car insurance company and Canada Revenue Agency, as well as your friends and family.
And that’s it. Congratulations, you are now a proud homeowner.
Buying a property is a substantial commitment of your resources and can be overwhelming if you are unfamiliar with the process. The most critical determiner in the home-buying journey is whether you have the money – for the down payment, closing costs, home inspection & appraisal fees, legal fees, home and fire Insurance, land transfer tax and so on.
If you are self-employed, real estate investments are an excellent way to create an additional income-generating source. With lower interest rates and demand outstripping supply, the Canadian real estate market has been a steadily growing sector. And you get the chance to build equity.
Consult experts wherever possible – a mortgage broker for pre-approval and optimal mortgage rate or real estate agents for guiding you to the best properties. You can also explore government initiatives such as the home buyer’s plan to see if you are eligible for the benefits.
Home buying is a challenging road, but it can be a fulfilling experience if you follow the steps to buying a house in Canada.