2023-01-23T17:21:09-05:00Aug 24, 2020|

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Mortgages 101: How to finance your first home in Canada

Owning a home in Canada is a goal many newcomers dream of achieving. Unlike other smaller assets, buying a home or property involves a significant amount of financial investment. 

As a newcomer, you may have many questions about the process of financing your first home in Canada. In this article, we will walk you through the basics of getting a mortgage, outline the hidden costs, and share some budgeting tips and advice to help you buy a home. 

What is a mortgage?

A mortgage is a loan from a bank or a lender. It enables a potential buyer to purchase a home or a property without having to pay the full amount by themselves. The maximum mortgage offered by a bank is 95 per cent, with some limitations. 

Fixed vs variable mortgage rates

In Canada, mortgages have two types of interest rates. Borrowers can choose between – 

  • A fixed interest rate: Does not fluctuate and is applicable for a pre-defined time period (called a “term”). Generally, the term most people opt for is five years. 
  • A variable interest rate: Fluctuates based on the prime lending rate – which is primarily influenced by the policy interest rate set by the Bank of Canada (BoC). The prime lending rate is the annual interest rate that Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages. Depending on your financial institution or the lender, you may be able to switch from a variable interest rate to a fixed-rate at no additional cost. Be sure to check with your lender of any payment changes based on the prime rate and review all potential risks.
Learn more about the process of renting and buying property in Canada by downloading the Housing Guide by Arrive. Whether you’re looking to find temporary accommodation for your first few weeks  or if you’re looking for a more permanent, long-term option, this guide will provide resources, tips, and advice to ensure you are making the right decisions on housing for you and your family.

5 steps to finance your first home in Canada

1. Reach out to a mortgage specialist

The first step in buying a home or any property in Canada is to reach out to a financial institution or lender that does mortgages. They will be able to guide you considering your own unique situation. 

Generally speaking, there are three main requirements to be fulfilled as part of a mortgage application:

  • A down payment: This is the cash that you would pay for the purchase of your house or property. For a purchase of up to $500,000 CAD, the minimum down payment required is generally five per cent of the total cost, but it can also vary based on other factors such as your status in Canada (permanent resident, temporary foreign worker, student, etc.), assets owned, and your income. For purchases worth $500,000 to $999,000 CAD, you would need 10 per cent, and for homes that cost over a million dollars, you have to pay a minimum of 20 per cent as a down payment. 
  • Credit history: Borrowers are usually expected to provide a year-long credit history either from Canada or your home country. The requirement for a credit history may be excluded if a large down payment is made. In this scenario, your other personal assets in Canada may be considered. Building good credit history takes time; therefore, get started as soon as you move to Canada.
  • Assurance of mortgage repayment: The financial institution or lender will typically assess the means through which you would be able to repay the loan. Existing sources of income (with a 90-day history) and your potential to earn an income in Canada are taken into consideration while approving a mortgage application. 

Documents required for a mortgage:

  • Depending on your length of time in Canada, you may be required to provide proof of income from your previous employers, bank statements, investment records, and credit history from your home country for a duration of 12 months. 
  • Having two separate credit histories in Canada is preferred. Two credit histories can be obtained by holding two credit cards, by showing another loan, or separate credit transactions. 
  • If there are two or more borrowers on a single application, ensure that each person applying has their own individual credit reports.
Whether you’re ready to buy a home or just starting to save for a down payment, RBC can help you get settled faster.
Book an appointment with an RBC Advisor to speak with a mortgage specialist who can sit down with you one-on-one to help you make the right decision. Once you have your appointment booked, an advisor will reach out to check whether you’d like to meet via phone, video or in-branch.

2. Get pre-approved and budget for your new home

Next, it is recommended to get pre-approved for a mortgage. Having pre-approval indicates that you’ve met the basic eligibility criteria (down payment, credit history, and income) for getting a mortgage. As part of the pre-approval process, the bank will let you know the maximum purchase price and outline the down payment. 

Once all required documents are provided, a pre-approval can be granted within a short period of time. 

Tips for planning and budgeting to buy a home:

  • You can use the purchase price and down payment information provided by the bank to budget for your home/property purchase. 
  • Research on default insurance and inquire about how it might differ if you increase your down payment. Default insurance is usually applied when the down payment is below 20 per cent.
  • Ask your advisor about flexibility with making additional payments and paying off your mortgage early.
  • You also need to budget for – 
    • A lawyer who will assist with transfer of funds for the purchase and change in property title. Legal fees can range between $2,000 to $3,000 CAD. 
    • Land transfer tax, depending on the province. It is based on a percentage of the purchase price of the property. The tax varies from province to province and can be a significant cost. For instance, Alberta does not have land transfer tax, but British Columbia does. Some municipalities also charge an additional land transfer tax (for example, Toronto), which essentially doubles your taxes.
    • A house inspector who will provide an estimate of maintenance costs and highlight if there’s any underlying issues or concerns that need to be addressed. The cost of an inspector could range between $500 to $700 CAD.  
    • Expenses to fix any issues (such as termites, foundation cracks, piping, etc.) that are highlighted in the inspection.
    • Maintenance costs – Homeowners have to cater to various recurring or one-time maintenance costs such as roofing, tree removal, yard maintenance etc. Maintenance costs vary by age and size of the home. But as a general guideline, one per cent of the purchase price can be budgeted for maintenance annually. For condos, there is usually a fixed monthly fee for maintenance that gives owners access to shared amenities in the building. 
    • Insurance premiums – Mortgage insurance for life, disability, critical illness, and loss of income are optional and can be added to ensure protection in any unforeseen circumstances. These usually require a premium to be paid, which is included in your mortgage payments.
    • GST/HST on a new home or a home that’s been extensively renovated.
    • Title insurance to provide coverage for losses related to title fraud, survey issues, problems with the title and challenges to the ownership of your home.
    • Service charges from utility companies for hook-ups on electricity, gas, internet and telephone services.
    • Additional taxes and fees, if you’re purchasing property as a non-permanent resident of Canada.
    • Appraisal fees – Mortgage lenders may ask you to have an appraisal done as part of the mortgage approval process. An appraiser provides a professional opinion about the market value of the home you want to buy. An appraisal fee is generally between $350 and $500 CAD.
    • Moving costs – Before moving in, you may also have to pay for moving costs, storage costs, and mail redirection costs.
    • Furniture and appliances – You may have to purchase new furniture and/or appliances for your home.

3. Evaluate leveraging the First-Time Home Buyer Incentive

The government of Canada offers the First-Time Home Buyer Incentive to help people across Canada purchase their first home. The program provides buyers with five (or 10 per cent, if it’s a new home) of the home’s purchase price, in the form of a no-interest loan, to put toward a down payment. This addition helps lower your mortgage carrying costs, making homeownership more affordable. You pay back the same percentage of the value of your home when you sell it or within a 25-year window.

The First-Time Home Buyer Incentive is like a second mortgage on your home and has some eligibility criteria and fees attached to it. Consult with a mortgage specialist to know if the Incentive would be beneficial to your unique situation.

4. Submit mortgage application after finding a home or property you’d like to buy

If you had your mortgage application pre-approved, the final approval process could take up to a week. But there’s no need to worry because your application will be prioritized to meet the financing condition date mentioned on your purchase contract. 

If you didn’t have pre-approval, as long as you are able to provide all the required documentation in a timely manner, it could still take the same time to be approved. Pre-approvals are recommended prior to finding a home/property to avoid any delay in completing your purchase – and to ensure you have time to gather all required documents. 

5. Repaying the mortgage

Most borrowers set up a mortgage that’s repaid over a 25-year time period. Usually, you have the ability to make extra payments – this will help reduce amortization and the duration of the mortgage. 

If you default on a mortgage payment and continue to default, you could potentially risk losing your home. 

If you decide to sell your home/property before you’ve finished paying off the mortgage, money earned from the sale would be used to pay off the remainder of your mortgage, and any additional amount would be paid to you as equity of the property. 

Buying a house within the first few months of moving to Canada

You may qualify for a mortgage to buy a house or property within the first few months of moving to Canada, if you’re able to meet the basic criteria of down payment, credit history and/or assets, and are able to show a steady income. Note that if you opt for a down payment of less than 20 per cent of the purchase cost, you need to show at least three months of full-time employment in Canada.

Keeping up with financial requirements while buying a house can be challenging. As a first-time home-buyer in Canada, ensure your financial advisor or mortgage specialist is experienced, knowledgeable, and is fully aware of the home buying process. And once you’ve found the home or property you want to buy, be sure to iron out all the details with a trusted financial advisor because you’re in it for the long haul.

Webinar: Finding your home in Canada

Join Shikha Bhuchar (Arrive), Li Koo (Realtor), Manish Garg (RBC Mortgage Specialist) and Maxime Gazeau (Senior Researcher) as they dig into housing in Canada.

Watch the recording now!

This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.