Buying a first home is a big milestone for most Canadians. However, attempting to navigate Canada’s booming real estate market as a first-time home buyer can be quite challenging. Nonetheless, you shouldn’t let this dissuade you from becoming a homeowner as there are many benefits.
Before you dive into the market for the first time, it’s important to do your due diligence and understand the benefits as well as the risks involved with home ownership, create a home buyer plan. Below are a few guidelines that will help you navigate the housing market successfully.
Guidelines for potential home buyers
- Down payment – Most Canadians will need a mortgage to buy their first condo, townhouse or house. In Canada, the minimum down payment to purchase a property is 5%; however, this only applies to properties with a value of less than $500,000. As the price of the property increases, the required down payment also increases, if the property is between $500,000 and $1,000,000 you will need 5% of the first $500,000 plus $10% of the next $499,999, and if the property is $1,000,000 or greater then you need a down payment of at least 20% of the home’s value. It is important to note that if you put less than 20% down the property will have to be under $1,000,000 purchase price as you will need mortgage insurance in order to make your purchase.
- Check your credit report and score – If you haven’t checked your credit report in the last 12 months or ever, you are entitled to get a free copy of your report once per year from the two Credit Reporting Agencies in Canada, Equifax and TransUnion. Here are links to obtain a free copy online: Free Equifax Report or Free TransUnion Report. Banks and lenders will consider your credit report and score while making a decision on whether or not to give you a mortgage and the interest rate they will charge you. There are some exceptions with certain alternative or private lenders that don’t consider the borrower’s credit report and score, however they will may require you to already be a homeowner.
- We do research on different mortgages for you – There are dozens of options available to you when it comes to mortgages. A Mortgage Broker will help you by researching the current marketplace for you and assist you in picking the right mortgage that best suits your needs, wants and financial situation. Mortgage professionals at Mortgage Maestro will ask you some questions to make sure they understand your needs and explain the entire process and options available you. They will help you decide whether to pick a fixed or variable rate of interest or whether you’d want an open mortgage that can be paid down or out anytime without penalties, but may require an interest premium, or a closed mortgage that can be paid down or out earlier but with penalties.
- What is the stress test? – Home buyers need to satisfy the requirements of the mortgage stress test as set out by the Government of Canada to qualify for a mortgage in Canada. All borrowers, regardless of the down payment they make, must provide proof that they can afford payments on their contracted interest rate or if the interest rate fluctuates. For example, if the bank offers you a rate of 2%, you’re still required to show that you can afford monthly payments if the interest rate increases to 5%.
- Protect Your Credit – Before you choose your mortgage, it’s prudent to compare different mortgages, rates, qualification requirements, and interest rates across multiple lenders and financial institutions, the problem is this can result in multiple pulls of your credit report, driving the score down and affecting your ability to get the mortgage or rate you deserve. This is where having a mortgage broker working for you pays off, mortgage brokers can pull one credit bureau and use it with all the banks and lenders, thereby protecting your credit score! The best part is that even though the broker is representing you, does all the shopping for you, and they get paid by the lender when your mortgage gets placed, you get professional unbiased advice and the lender pays.
Which interest rate type is best for first-time home buyers
For a first-time homebuyer’s, it’s important to consult an independent mortgage professional like a mortgage broker that works for you and not the lender when considering the various mortgage options available to you in addition to any first-time homebuyer programs.
The type of rate you choose as a first-time home buyer can make a huge difference in payments. For example, potential borrowers in Canada have an option to choose between a fixed-rate and variable-rate mortgage. With a fixed-rate mortgage, your interest rate stays the same across the duration of your mortgage, however you could be charged a different interest rate and may incur a penalty if you pay off the loan early.
Conversely, a variable-rate mortgage typically has lower interest rates, but the rate you negotiate with your lender will fluctuate based on the Bank of Canada’s prime rate. In essence, there are pros and cons to both mortgages so it’s important to do your own research and consult with your lender with respect to which one best fits your financial situation.
Programs for first-time home buyers
The Government of Canada offers a wide range of national programs to first time home buyers, below are a few examples:
- First-time Home Buyer Incentive – The program lets qualified buyers borrow money (can be 5% or 10% of home’s purchase price) from the federal government to be used for a down payment. You have to pay back the loan within 25 years or whenever you sell the home. Although one of the drawbacks for this incentive is that the eligibility guidelines are quite strict.
- Home Buyers’ Plan – First-time home buyers are able to withdraw up to $35,000 tax-free from their registered retirement savings plan (RRSP) which is earmarked for a home purchase. However, the funds must be paid back within a 15 year time limit.
- First-Time Home Buyers’ Tax Credit (HBTC) – the calculation of the HBTC is commonly referred to as the ⦁ Home Buyer’s Amount. If you qualify, you can claim up to $10,000 for the purchase of a qualifying home which could provide a tax credit of up to $1,500. This allows homebuyers to recover some of the costs associated to their home purchase. It can help offset costs like legal fees, inspections, and other closing costs for example.
Mistakes to avoid as a first-time home buyer
As mentioned earlier, first-time homebuyers should actively look to avoid certain aspects that can cause challenges in the process:
- Shopping outside of your budget – It’s all well and good to look for the best possible home, but don’t stretch yourself too thin. Be prepared to budget for property transfer tax, strata fees, legal fees, and moving costs on top of the mortgage. A mortgage broker will help you with budgeting your mortgage payment that make sense for your needs, not just simply saying here is the maximum mortgage you qualify for.
- Buying a home at first glance – This can be counter-productive. Sometimes, it’s easy to become enamored by a home after the first few seconds of walking into it. However, before submitting a final offer you should check on the condition of the home. Ask specific questions like when the roof was last maintained or replaced or how old are the furnace and hot water tank. Your Realtor can get all this information for you, if you are not working with a Realtor, we can help make an introduction to one for you.
- Don’t Skip a home inspection – This is a crucial step before making a final offer as it can uncover many unforeseen circumstances like water damage or foundational cracks . Carrying out a home inspection in advance can save you quite a bit of money and stress in the near future.
How do I claim my first-time homebuyer’s tax credit?
The Canada Revenue Agency (CRA) has outlined how to make first-time home buyers tax credit claim on your tax return. The CRA has also published a list, which contains the requirements to qualify as a first-time home buyer. Here’s how to know whether you qualify or not:
- Either you or your partner have bought a home that qualifies. Qualified homes include:
- It is a single-family, semi-detached, townhouse, mobile home or condo.
- It’s an existing or new construction home located in Canada.
- You have moved in within a year of making the purchase.
- The property is listed as your main residence and is registered under your name or your partner’s.
- Neither you nor your partner have owned and lived in a home within the previous four years.
Secure a mortgage with Mortgage Maestro
Mortgage Maestro can help you secure a mortgage to buy your first home. We have access to an extensive network lenders and we’ll do all the heavy lifting for you to make sure you find a solution that works best for you. Our advice is free to you in most cases and unbiased because we work for you not the lenders.
Contact us today and we’ll have a mortgage professional assigned to you immediately.