First Time Home Buyer

Purchasing your First House is thrilling yet can be daunting, especially if you're unclear about the beginning steps. We've simplified the process into key actions, from determining your budget to securing mortgage pre-approval and exploring government assistance programs. For any queries, our comprehensive guide for first-time home buyers has got you covered.

Cost of Buying a House in Canada

In the Greater Toronto Area (GTA), the First-Time Homebuyers often make a smaller Down Payment compared to those who have previously owned property. This is because they don't have equity from a former home to carry over. Homeowners can use the increased equity from their current home as a larger down payment for their next property. Buyers who have less than a 20% down payment need to account for the additional expense of mortgage loan insurance, also known as mortgage default insurance, in their budget.

Further information on this topic includes:

  • Guidance for home buyers on the ideal size of a down payment
  • Strategies for investing down payment funds while navigating the Real Estate market
  • Required income levels to afford a home in Toronto and the GTA

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Deposit

When you sign a purchase agreement for a property, you pay a deposit. This deposit is applied to your down payment but is usually non-refundable.This means if you decide not to proceed with the purchase before it's finalized, you're likely to forfeit this money. In Canada, there's no fixed deposit amount. A common practice is to use about 5% of the home's purchase price (which would be $50,000 for a $1 million home). However, due to the recent surge in housing prices, some sellers are willing to acceptless than 5%. In situations with multiple offers on a property, the seller might request a higher deposit. While there's often room for negotiation, a 5% deposit can demonstrate your commitment to the seller, potentially giving you an edge in competitive markets. It's important to have these funds readily available, as they are usually required within 24 hours after the real estate contract is signed

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Closing Cost

Starting discussions with clients about closing costs is essential, as these often impact the available down payment

Closing costs include expenses like lawyer fees, land transfer taxes, and other administrative fees. They vary based on the property's price and location, usually amounting to 1.5% to 4% of the purchase price. For instance, if you've saved $50,000 for a down payment, you'll need additional savings for closing costs or deduct these from your down payment.

It's also wise to budget for costs such as,

  • Home inspection
  • Utility Connections
  • Moving
  • Pre Paid Property Taxes
  • Immediate necessities like furniture, appliances etc.

If you're aiming for a 5% down payment, you actually need at least 6.5% of the purchase price to cover these initial expenses. Additionally, it's crucial to have extra funds for emergencies, like unexpected repairs. For a property around $600,000, it is suggested having an emergency fund of $5,000 to $10,000.

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Programs & Tax Rebates for First-Time Home Buyers

Numerous government initiatives and tax incentives are available to assist first-time buyers in entering the housing market

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Savings Account for First-Time Home Buyers

The First Home Savings Account (FHSA) is a newly introduced registered account aimed at helping first-time homebuyers save for their down payment. Contributions to and withdrawals from this account are tax-exempt. Similar to a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), any income generated from interest, dividends, or capital gains within the FHSA is also tax-free. Individuals are allowed to contribute up to $8,000 annually, with a lifetime limit of $40,000. The funds in an FHSA can be kept for a maximum of 15 years. After this period, the funds must be utilized to purchase a home, transferred to an RRSP or a Registered Retirement Income Fund (RRIF), or withdrawn as taxable income.

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Fist Time Home Buyers Plan

The Home Buyer's Plan, a program by the federal government, permits you to take out up to $35,000 from your RRSPs ($70,000 for couples) to use as a down payment on your first home. This amount can be withdrawn and utilized without incurring any penalties or taxes, provided it is reimbursed to your RRSP within a 15-year period.

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First Time Home Buyers, CMHC Equity Sharing Program

The First-Time Home Buyer Incentive offers qualified first-time purchasers an interest-free loan amounting to either 5% or 10% of their home's purchase price, which can be used for the down payment. In this arrangement, the government holds a share in the property, which needs to be paid back either after 25 years or upon the home's sale—based on its market value at the time of sale. While this program has its advantages, it may restrict the highest purchase price First-Time Buyers can afford. This is part of the reason why the Federal Government, in its 2022 budget, announced the extension of the program until March 31, 2025. The government is also considering ways to enhance the program's flexibility and responsiveness to the needs of First-Time Buyers, including those in single-led households.

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Tax Credit for First Time Home Buyers

In 2022, the Federal Government increased the Home Buyers' Tax Credit to double its previous amount. Now, First Time Home Buyers can claim up to $10,000 on their taxes, translating to a rebate of up to $1,500, for homes bought on or after January 1, 2022.

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Rebate on Land Transfer Tax

In Ontario, British Columbia, and Prince Edward Island, eligible buyers can receive rebates on land transfer taxes. Additionally, the City of Toronto, unique in Ontario for imposing its own land transfer tax, also offers rebates. The eligibility criteria and the potential rebate amount vary across these jurisdictions.

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Insight into Canadian Mortgage Systems

What is a Mortgage: A Basic Overview

A mortgage is essentially a loan for purchasing a home or property. It includes an interest rate, a repayment schedule (amortization), and other specific terms. The property itself serves as collateral for the mortgage, meaning the lender can repossess the home if payments aren't made.

Before applying for a mortgage, it's crucial to understand these key terms to choose the right mortgage for you:

Term:The duration of your mortgage contract, ranging from tsix-months to over five years.

Amortization: The total time it will take to pay off your mortgage, usually offered between five to 25 years by major Canadian lenders, with up to 30 years for down payments of at least 20%. The mortgage is usually paid off over several terms.

Interest Rate: The charge for borrowing, included in your regular mortgage paymevnts along with the principal repayment.

Open or Closed Mortgages: This determines repayment flexibility. Open mortgages allow for renegotiation or early repayment, while closed mortgages, typically with lower interest rates, don't offer this flexibility.

Fixed and variable rates: Fixed rates remain constant throughout the term, while variable rates can change with market conditions.

Further topics to explore:

  • The most suitable mortgage for first-time home buyers
  • The feasibility of a 30-year mortgage in Canada
  • Guidance on understanding mortgage documents

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Choosing Between Fixed & Variable Mortgage Rates

In Canada, when securing a mortgage, home buyers have the option to select either a fixed or a variable interest rate. This choice significantly impacts the total interest paid throughout the mortgage's repayment term. It also decides if your interest rate remains constant ("fixed") or could vary during the mortgage term. To clarify these options, we can look at the distinctions between five-year fixed and five-year variable mortgage rates. 

Five-Year Fixed Mortgage Rates: In this arrangement, the interest rate is set for a period of five years, allowing for predictable mortgage payments throughout the contract term. Generally, fixed rates are higher compared to variable rates, but they offer the advantage of stability.

Five-Year Variable Mortgage Rates: These mortgages, spanning five years like their fixed counterparts, differ in that their interest rates can fluctuate over the contract's duration. Depending on your mortgage's specific terms, your regular payment amount might vary or remain the same as interest rates rise or fall.

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Where to get Top Mortgage Rates

We can help you the most competitive fixed and variable mortgage rates currently on offer in Canada.

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Choosing Between a Lender and a Mortgage Broker

For their mortgage needs, some first-time home buyers prefer approaching their bank, where they already have established financial relationships. While this is a perfectly valid approach, and convenient for those who like to keep all their financial dealings in one place, exploring more options could be financially beneficial. Comparing rates online or consulting a mortgage broker could lead to savings. A mortgage broker is a professional who connects with a network of lenders to find the most suitable mortgage for your needs.

Approaching your bank limits you to a single lender, but a broker opens doors to multiple lenders, including various banks and credit unions. Some financial institutions cater to specific groups, like new Canadians or self-employed individuals, and a broker can help identify the best fit for your specific situation.

Further information on this topic includes:

  • Understanding the role of a mortgage broker
  • How mortgage brokers are compensated
  • Five things your mortgage broker might not be disclosing
  • Clarifying if there are fees associated with using a mortgage broker

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Navigating Mortgage Options with Calculators

For first-time buyers, comparing
various mortgage options can be
challenging. This is where Mortgage
Calculator
proves to be invaluable.
These online tools help you understand
how a mortgage might affect your financial situation.

calculator

Questions like whether you can currently afford a mortgage, or how changes in amortization length or interest rates could impact your payments, can be explored using these calculators.

Check out our range of mortgage calculators designed for first-time home buyers

  • Mortgage Affordability Calculator
  • Mortgage Payment Calculator
  • Land Transfer Tax Calculator
  • Mortgage Insurance Calculator

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What is the Maximum Mortgage Amount I Can Afford?

After accumulating a substantial down payment, the subsequent step involves determining your affordable mortgage amount — the sum you'll repay, including interest, to the lender. The mortgage value is the total cost of the home minus your down payment.

In assessing your mortgage application, lenders will consider your Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio. These ratios help ascertain the feasible mortgage amount for someone with your income and debt levels.

These ratios essentially evaluate your income against your debt and expected housing costs, influencing the mortgage amount you qualify for. TDS (Total Debt Service) ratio is calculated by dividing the costs of your new home (like mortgage payments, heating bills, taxes, and any condo fees) by your gross household income. GDS (Gross Debt Service) ratio includes these housing expenses plus any existing debt payments (such as car loans and credit lines), divided by your gross household income.

The Canada Mortgage and Housing Corporation (CMHC), the country's national housing agency, deems housing affordable if your GDS and TDS ratios are below 39% and 44%, respectively. Meanwhile, the Financial Consumer Agency of Canada sets these limits at 32% and 40%, respectively.

Additional topics to explore:

  • Determining how much mortgage you can afford
  • How a line of credit might impact your mortgage application
  • Tips for making your first home purchase more affordable in Toronto
  • The effect of credit card debt on mortgage applications

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The Importance of Getting Pre-Approved

Understanding your affordability is just the first step; next, it's crucial to get pre-approved. Pre-approval means you've prepared for approval. "It involves organizing your paperwork, like your credit report, verifying your income, and ensuring the property price is within your means, considering your debt-to-income ratio." there is a need for a 90-day history on your down payment funds, a measure to prevent money laundering in Real Estate transactions.

The goal of mortgage pre-approval is to confirm that you're looking at houses within your budget. You may face disappointment and time loss that comes from exploring properties out of your price range. Pre-approval means ensuring you're considering the right properties. It's also a way to demonstrate to sellers that you're a serious buyer with organized finances. In competitive markets, this can be a decisive factor in whether your offer is accepted.

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Determining Your True Affordable Mortgage Amount 

A mortgage pre-approval indicates what lenders are prepared to offer, but this doesn't always align with what you can realistically afford. TDS and GDS ratios provide general guidelines based on averages, not specific to individual or family circumstances. To understand what you can comfortably afford without becoming 'house poor' (where your mortgage payments are so high that they leave little room for other expenses), it's crucial to draft a detailed monthly budget. This budget should account for everything, including groceries, cell phone bills, entertainment, and transportation.

Two households with identical incomes might have vastly different housing budgets due to their lifestyle choices, something your lender won't consider when offering a mortgage. Personal expenses are not kept in account. Therefore, if you frequently travel or have high commuting costs, these should be included in your considerations before deciding on a mortgage.

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Understanding the Mortgage Stress Test

The Mortgage Stress Test is a crucial process used by lenders to assess whether buyers are eligible for a mortgage and the amount they can borrow. This test is applicable even for those with a down payment of 20%

The Mortgage Stress Test was implemented to ensure Canadians can afford their homes even if mortgage rates rise. It is logical to think that with historically low mortgage rates observed in recent years, there's an expectation of the rate to increase in future. The Mortgage Stress Test is essentially a safeguard against potential future hikes in mortgage rates.

The Mortgage Stress Test underwent changes in 2021. The revised rules require lenders to use either a benchmark rate of 5.25% or a rate that's 2% higher than the one you're being offered, depending on which is greater.

This stress test is an integral part of your mortgage application and applies to all property purchasers in Canada, not just first-time buyers.

Seek our help in the following areas of concerns

Understanding the Canadian mortgage stress test for home buyers. Why the mortgage stress test isn't as bad as it's portrayed.

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Guidance for First-Time
Home Buyers in Canada

Guide

Advice for First-Time Buyers

Navigating the high Real Estate prices of today's market requires a sound financial strategy and sometimes a bit of creativity for First-Time Home Buyers. Whether you're aiming to purchase in one of Canada's most competitive markets or just seeking advice to avoid common home-buying pitfalls, our Mortgage Team welcomes you to discuss concerns like,

Effective Strategies for First-Time Home Buyers

Common Mistakes Made by First-Time Home Buyers

Succeeding as a First-Time Home Buyer in GTA

Advantages for First-Time Home Buyers in Ontario

Real Experiences of
First-Time Home Buyers in Ontario


For more information,

Top Locations for Home Purchases in Canada

Beginning your search for the ideal home but unsure where to start? The landscape of the Canadian housing market has changed significantly since the COVID-19 pandemic began. This shift includes skyrocketing Real Estate prices and a trend of people moving to traditionally less populated rural areas. To assist you, we've compiled a Guide on the best places to Buy Real estate in Canada. This guide can be valuable to know about neighborhoods across the country, taking into account factors like average home prices, recent price growth, and the characteristics and economy of each neighborhood.

Speak To Us to to better understand why homes are selling far above list price, the financial benefits of relocating to a smaller city, weighing the real costs of moving out of the city: should you stay or go?

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Is Homeownership Right for You in Canada?

Owning a home comes with numerous advantages. You gain control over your living space, no longer subject to a landlord's decisions, and the potential to generate rental income from your property. Moreover, homes in Canada are generally considered a secure investment since they tend to appreciate in value over time.

However, homeownership isn't a one-size-fits-all solution. Your personal circumstances play a significant role. For instance, if your job is uncertain or if you anticipate relocating soon, renting might be a more flexible and financially sound choice.

Renting can also be attractive for those who prefer not to handle homeownership responsibilities like maintenance, property taxes, and repairs. If you feel financially unprepared or lack the necessary financial management skills for homeownership, it's perfectly acceptable to opt for renting, according to Davie's advice.

Our Mortgage broker, echoes this sentiment, emphasizing that individuals seeking a more hands-off living arrangement often find renting to be a better fit. Renting relieves you of the financial burden of property taxes, utilities, home upkeep, and unforeseen repairs.

For more insights on this topic, consider exploring the queries:

  • Is it the right time to buy a home,
    or is renting a better choice?
  • Rethinking rentership: Strategies for financial progress while renting"
  • Renting vs. homeownership: Achieving financial security without buying
Home

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