It goes without saying that buying a house is a huge financial commitment. As such, it requires thorough research and sufficient professional and legal advice. In Canada, there are certain nuances you need to understand to avoid violating rules or missing out on benefits. Hence, you are not alone if you feel overwhelmed by all the things to know when buying your first home in Canada.
This guide is here to ease those concerns. We will offer clear, actionable steps to help you understand the entire process—from setting a budget to sealing the deal. By the end, you’ll have the knowledge to move forward confidently, making your dream of homeownership a reality.
New Rules for Buying House in Canada
The most recent rules on buying a house in Canada are the ban on foreign home buyers and the new mortgage rule. With these changes, the government of Canada aims to address the housing challenges in the country. Understanding these rules makes you aware of your eligibility and possible benefits.
Ban on Foreign Home Buyers
Foreign investors are now limited in accessing Canadian residential real estate, especially in major urban areas. This is due to the Prohibition on the Purchase of Residential Property by Non-Canadians Act. This law took effect on January 1, 2023, and has been extended until January 1, 2027.
Thankfully, this law does not prohibit all foreigners from acquiring properties in Canada. If you have received Canadian citizenship or are a permanent resident, you are not affected by the law. Also, certain temporary residents like those on work permits meeting specific conditions can still purchase properties. Refugees and individuals purchasing properties with a Canadian spouse or partner may also be exempt.
Before buying your first home in Canada, ascertain your eligibility first as there are penalties for violating the law. Offenders can face fines of up to CAD 10,000. Courts may also order the sale of properties acquired unlawfully, with the proceeds (after fines) returned to the buyer, capped at the original purchase price.
New Mortgage Rules
The Canadian government recently announced new mortgage reforms. These changes are effective December 15, 2024, and aim to benefit first-time homebuyers and those purchasing newly constructed homes.
A first-time home buyer is defined as anyone who hasn’t owned a home or lived in an owned home in the past four years or experienced a marital breakdown.
Extended Amortization Periods:
First-time homebuyers and buyers of newly built homes can now access insured mortgages with 30-year amortisations, up from the typical 25 years. This extension reduces monthly payments, making it easier for buyers to qualify under the stress test. However, it results in higher interest paid over the loan’s life.
Increased Price Cap for Insured Mortgages:
The maximum price for properties eligible for insured mortgages has increased from $1 million to $1.5 million. This change is particularly impactful in high-cost markets like Toronto and Vancouver, enabling buyers to purchase more expensive homes with a lower down payment (as little as 5% on the first $500,000 and 10% on the remainder).
Understanding Taxes When Buying Your First Home in Canada
It is important to understand the taxes relating to home purchases in Canada to avoid unexpected costs. Some of these taxes are discussed below. However, you can consult with a tax professional or real estate advisor for guidance tailored to your province and circumstances.
Land Transfer Tax (LTT)
- Provincial Tax: All provinces (except Alberta and Saskatchewan) charge an LTT based on the property’s purchase price. Rates vary by province, with marginal rates applied in tiers.
- Municipal Tax: In cities like Toronto, buyers pay an additional municipal LTT.
- First-Time Buyer Rebates: Some provinces offer rebates to first-time homebuyers. A rebate is a partial refund on the tax.
Goods and Services Tax (GST) and Harmonized Sales Tax (HST)
- Applicable only to newly constructed homes or substantial renovations.
- The rate varies between 5% (GST) and up to 15% (HST) depending on the province.
- Rebates may be available for new home purchases under certain price thresholds.
Property Taxes
- These are annual taxes levied by municipalities based on the assessed value of the home.
- Rates and payment schedules vary by city and are used to fund local services like schools and road maintenance.
Speculation and Vacancy Taxes
- Some provinces, such as British Columbia and Ontario, impose taxes to deter speculative investments and foreign ownership. For example, the Speculation and Vacancy Tax (SVT) in BC targets properties left vacant.
Non-Resident Speculation Tax (NRST)
- In Ontario and British Columbia, foreign buyers may pay an additional tax of up to 25% on residential properties.
Mortgage Insurance Taxes
- For down payments of less than 20%, buyers need mortgage default insurance (CMHC insurance), and the premium is subject to provincial taxes.
Buying Your First Home in Canada Checklist
1. Determine Your Budget
Calculate your income, expenses, and existing debt to determine how much you can afford. Consider the following expenses when evaluating the total possible cost.
Maximum Mortgage Affordability
Gross Debt Service (GDS) Ratio: Lenders typically allow up to 32% of your gross annual income to be used for housing costs (mortgage payments, property taxes, heating, and half of condo fees, if applicable).
Total Debt Service (TDS) Ratio: Your total debt obligations (including the mortgage, credit cards, and car loans) should not exceed 40-44% of your gross income.
Determine Your Down Payment
A higher down payment reduces your mortgage amount and avoids the need for mortgage insurance (if at least 20%). Hence, you may consider saving for a large down payment. The minimum required down payments are:
- 5% for homes up to CAD 500,000.
- 10% on the portion between CAD 500,000 and CAD 1 million.
- 20% for homes over CAD 1 million.
Account for Additional Costs (Closing Costs)
Closing costs typically range from 1.5% to 4% of the home price and include:
- Land Transfer Tax (varies by province).
- Legal Fees (CAD 1,000–CAD 2,500).
- Property Insurance and Property Taxes.
- Home Inspection (CAD 300–CAD 500).
- Mortgage Insurance Premiums if the down payment is less than 20%.
2. Get Mortgage Pre-Approval
Before buying your first home in Canada, get a mortgage pre-approval first. A mortgage pre-approval is a lender’s conditional commitment to provide you with a mortgage up to a specified amount, based on an evaluation of your financial situation. The lender will review your income, credit history, debts, and assets to determine how much you can borrow and the interest rate you qualify for.
First, compare rates from banks, credit unions, or mortgage brokers and choose the one with the most favourable offer. Then, apply for the pre-approval. Keep in mind that a pre-approval is not a guarantee of final approval but gives you a clear budget for house hunting and can lock in an interest rate for 90 to 120 days.
3. Find the Right Home
There are different types of houses in Canada including detached houses, townhouses, condominiums, etc. You need to decide what your preference is. Also, determine what you need within and outside of your home. From location to room sizes and amenities, prioritise your needs and start viewing properties.
Look for red flags such as water damage, foundation cracks, or outdated electrical systems. You should also take note of recent renovations and inquire about the home’s age and maintenance history. However, when you find your preferred home, hire a certified home inspector to assess the property’s condition. You can use findings to negotiate repairs or adjust the price if needed.
Additionally, when buying your first home in Canada, consider factors that affect resale value, such as location, school districts, and future development plans. Even if it’s your dream home now, thinking about resale potential is wise.
You may also consider using a real estate agent. A licensed real estate agent can provide valuable insights, arrange showings, and help negotiate offers. Choose an agent and discuss your preferences with them.
4. Make an Offer
Making an offer involves submitting a written proposal to the seller. Although you can make an offer yourself, it is best to use a real estate agent to ensure proper legal language. Some of the key elements in an offer include
- Purchase Price: The amount you’re willing to pay.
- Deposit: A good-faith amount (usually 1%–5% of the purchase price) that shows your seriousness.
- Closing Date: When you intend to take possession of the property, often 30 to 90 days from acceptance.
- Expiration: The date the offer expires (usually less than 48 hours)
- Inclusions/Exclusions: Specify what’s included (e.g., appliances, fixtures) or excluded from the sale.
5. Explore First-Time Home Buyer Incentive Government of Canada
There are different financial incentives you can explore when buying your first home in Canada to ease the financial burden. Ensure that you fully understand eligibility requirements and application steps.
First-Time Home Buyer Incentive (FTHBI):
A shared equity program where the government contributes 5-10% of the home’s purchase price as a loan to reduce your mortgage. It lowers monthly mortgage payments without interest for the duration of the loan. The loan must be repaid after 25 years or when the property is sold, whichever comes first, with repayment based on the home’s market value at that time.
Home Buyers’ Plan (HBP):
Allows you to withdraw up to CAD 35,000 from your Registered Retirement Savings Plan (RRSP) tax-free to put toward a home purchase. However, the funds must be repaid into the RRSP over a maximum of 15 years, starting the second year after the withdrawal.
Land Transfer Tax Rebates:
Some provinces and cities, like Ontario and British Columbia, offer rebates on land transfer taxes for first-time buyers.
6. Finalise Mortgage Approval
Finalising mortgage approval in Canada involves satisfying conditions outlined during the pre-approval process and ensuring that all legal, financial, and property-related criteria are met. You will need a real estate lawyer to help you review the necessary documents before signing.
The lender will require a professional appraisal to verify that the property’s market value aligns with the purchase price. If the appraisal value is lower than the agreed purchase price, you may need to provide a larger down payment or renegotiate the sale price.
Once all conditions are met, the lender will issue a mortgage commitment letter. This will outline the terms, interest rate, repayment schedule, and any other conditions. Carefully review the terms with your lawyer to ensure they align with your expectations.
7. Close the Sale
The lender will transfer the mortgage funds to your lawyer, who will then pay the seller and officially transfer ownership to you. Once all payments are made and the documents are registered, the home is yours.
Summarily
Buying your first home in Canada involves thoughtful planning, financial preparation, and the right support from professionals like real estate agents and lawyers. In this guide, we’ve explored everything you need to navigate your first home purchase in Canada, including setting a realistic budget, securing mortgage pre-approval, and accessing valuable first-time homebuyer incentives. Whether you’re a resident or exploring how to buy a house in Canada as a foreigner, following a step-by-step guide ensures you are well-informed on the right decisions to make
