The 2018 first-time homebuyers guide for Canadians

MortgageExtra costsDown paymentHome insuranceHouse huntingRenovationsTax creditsResourcesBuying your first home in Canada in 2018? Well, a lot has changed since last year — and you're going to have to understand how those changes impact you.But that's OK, because we're here to guide you through the buying process.Our First-Time Homebuyers Guide lays out all the terms you need to know when purchasing your first house, townhouse or condo. We've consulted experts and brokers to simplify all the jargon that makes buying property a complicated experience. We hope our guide will help take some of the stress out of your big decision.Let's get started.What you need to know about mortgagesAs a first-time homebuyer, you’re probably going to apply for a mortgage. This section will introduce you to all the basic concepts you need to know so you can apply for one feeling totally prepared.What is a mortgage?A mortgage is a type of loan you apply for when you’re in the market to buy a home. Mortgages can be acquired by applying online, by walking into a bank or by going through a broker. It’s backed by property, meaning that if you don’t keep up with the payment schedule, which is negotiated at the outset, the lender can take possession of the property. In most cases, when you apply for a mortgage, you're asking for a lot money. It usually takes decades to pay off a mortgage.What is a mortgage term?A mortgage is more than a large sum of money — it’s a contract with your lender. When you enter any contract, you and the other party need to agree on some key boundaries at the outset. A mortgage term refers to the length of time for which the details of the agreement are valid. Lenders offer terms ranging from six months to 10 years, with most Canadians favouring five-year terms.When your mortgage term expires, you can choose to renew your mortgage with the same lender, or you can compare rates and choose another lender. Some of the conditions that could change at the time of renewal include the type of mortgage (fixed-rate or variable-rate are some examples — more about these below) and the interest rate you’re charged.What is amortization?Basically, the amortization period is the amount of time it’ll take you to pay off both the principal and interest on your mortgage. That means a lender will provide financing with the expectation you’ll pay the loan back within 25 years, the maximum time frame in Canada (it used to be 30 years but that changed in 2012 for insured mortgages. You can still go to 30 years for uninsured mortgages. More on that below). You can get a mortgage for less than 25 years — over time, it would mean you’d pay less in interest. Conversely, the longer you stretch out your payments, the more you end up paying.Fixed versus variable?When you apply for a mortgage, you need to determine how big you want your mortgage payment to be each month. In order to answer the first part, you need to decide whether you want to a fixed-rate or variable-rate mortgage.Compare mortgage ratesLowestRates.ca allows you to quickly and easily compare mortgage rates from Canada's top banks and brokers.Get startedThe interest rate on a fixed-rate mortgage stays the same for the duration of the mortgage term and it can’t be renegotiated without penalty until the term reaches its expiration date.A variable-rate mortgage, also known as a floating rate mortgage, can change based on market conditions. More specifically, variable-rate mortgages are impacted by the lender’s prime rate, which in turn is influenced by bond yields and the Bank of Canada’s overnight rate. If either of those two rates go up, it could mean that the interest rate on your mortgage might also go up. It doesn’t always happen though. History shows that variable rate mortgages remain constant throughout the duration of the term, regardless of what interest rates do.Open versus closed mortgagesThe other factor you need to consider is how much flexibility you need built into the mortgage agreement with your lender. An open mortgage can be prepaid or renegotiated at any time without penalty. A closed mortgage cannot be repaid, renewed, or renegotiated early without incurring a penalty. Closed mortgages have lower interest rates associated with them rather than open ones — that’s because the lender has the certainty that you’ll stick with them during the term of the mortgage, or you’ll have to pay them for breaking your contract early.What is a prepayment charge?One of the basic pieces of personal finance advice is to pay off your mortgage as quickly as possible. So, the fact that your mortgage lender can charge a fee for topping up your monthly payment sounds totally counterintuitive — but they can totally do that. It’s called a prepayment charge and it can cost you thousands. Why is this even a thing? Prepayment charges exist to protect lenders, who rely on interest payments to make lending money profitable. When loans are paid off sooner than anticipated, lenders make less money off you. However, you can ask for prepayment privileges, which would allow you to make extra payments without incurring any additional charges.How do I qualify?It’s pretty simple: you need to be able to prove to your lender that you can afford a mortgage. According to the Financial Consumer Agency of Canada, in order to determine how much of a mortgage you can carry, lenders will look at: your income before taxes; your living expenses; your debts; your credit report and score; the amount of mortgage you’re asking for and the amortization period.How large should your mortgage be?Ah, the million-dollar question (this is to be taken literally if you live in Toronto or Vancouver).Traditionally, lenders rely on two basic metrics to guide their decision-making: your gross income and the amount of debt you have. The banks abide by the Canadian Mortgage and Housing Corp.’s gross debt service ratio (GDS), which states that your monthly housing costs should be no more than 39% of your gross monthly income. The second metric banks use is the total debt service ratio (TDS), which lays out your loans and debt payments.But in 2017, there was a shakeup in the world of lending: Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI) introduced new guidelines that decreased purchasing power for a lot of buyers. As of Jan. 1, 2018, first time homebuyers must show they can withstand an interest rate increase of two percentage points above the mortgage rate they qualify for, or at the five-year benchmark rate published by Bank of Canada (whichever one is higher).The new rules are estimated to have reduced purchasing power for many potential homebuyers by 18%. Only Canadians renewing their mortgage with their existing lender are exempt. Should I get pre-approved?Getting pre-approved for a mortgage means you talk to a lender before you officially need a mortgage. The lender will check your credit history and ask for evidence of your income. By taking this preemptive measure, you’ll know exactly how much you’re qualified to borrow and at what rate. Pre-approval can be a strategic advantage if you’re trying to buy in a competitive market: it allows you to make offers without attaching a financing condition, it saves you time (which can be crucial if a seller is fielding multiple bids), and it locks you into an interest rate for a few months (however, if rates go down, you can always get a lower rate — pre-approval isn’t binding).Banks versus brokers (and the rest)Generally speaking, there are two ways to get a mortgage: through a bank or a broker. Mortgage brokers are licensed professionals with access to multiple lenders — just like insurance brokers can offer insurance products from multiple insurers. Banks offer mortgages to their customers, and the cost of borrowing is dependant on that institution’s prime lending rate. Mortgages secured from brokers tend to cost less than ones advertised by the banks because brokers can purchases loans in bulk and can pass on the savings to the consumer. However, the banks do allow some room for negotiation.Credit unions, which are non-profit organizations and not technically banks, also provide mortgages, though they favour candidates with large down payments.More recently, non-traditional lenders called mortgage investment corporations (MICs) have been cropping up across Canada. MICs lend to people who have been turned down by the traditional lenders and charge significantly higher interest rates: think 10% or more. MICs are totally unregulated by any provincial or federal government and the mortgages they provide are not insured by the Canada Mortgage Housing Corp. MICs have been gaining a lot of traction in hot housing markets like Toronto and Vancouver, as many eager homeowners rely on their services to buy homes and bridge financing gaps.Getting the best rateOur research shows that Canadians are loyal to financial institutions. It runs deep — millennials are more likely to choose the bank their parents use. But you can’t always count on the banks to reward you for your loyalty. The key to getting the best mortgage rate is to compare the market.Websites like ours try to simplify that process with tools like our mortgage comparison pages, where we display rates by province and even by city, so your search can be hyperlocal. We try to be an impartial informational source for consumers. So even if you decide to go with your bank — maybe you’re vying for the bank’s mythical “discretionary” rate, which is well below the ones they advertise — at least you’re going into negotiations better informed. Information is the ultimate bargaining chip. Extra costsRising interest ratesAfter years of rock-bottom interest rates, the Bank of Canada (BoC) has finally begun a campaign to hike interest rates. With the U.S. Federal Reserve expected to make three or four rate increases in 2018, homebuyers should brace themselves for the BoC to follow suit. That fact, coupled with OSFI’s new stress-test regulations, means mortgages are about to get more expensive. To put it in perspective, even a 25 basis point increase on a $3,340 a month mortgage means paying $1,092 more a year.Land transfer taxesA land transfer tax is charged whenever property changes hands. It is calculated based on the purchase price. Most provinces charge a provincial land tax. In some cases, first time homebuyers might qualify for a discount.The City of Toronto is so far the only municipality that charges homebuyers its own land-transfer tax, so if you’re buying in Toronto, you’ll pay the provincial and municipal tax.Appraisal feesAn appraiser determines what a property is worth and they’re an important part of the mortgage approval process. Lenders typically have their own stable of appraisers, but they’ll still pass on the cost to you, the homebuyer. An appraisal will usually cost around $300-$500.Title insuranceThe title is a legal concept that denotes the lawful owner of a property. Title insurance offers homeowners protection from fraud, identity theft, and forgery.While quite common in the U.S., you aren’t legally required to buy it in Canada — in fact, it only started being offered in 1991, when a handful of American insurers started selling it. There is some debate around whether you should or shouldn’t get title insurance — make sure to ask your lawyer about the benefits and if it’s right for you. If you do choose to get title insurance, it could set you back around $250-$350.Property tax and utility adjustmentsIf you’re buying a property and moving in halfway through the month, the previous owner may have prepaid their tax bill. Or they may have used utilities that will then get charged to you when you take over the utility account for the unit.Your real estate lawyer will take care of any property tax adjustments that need to be made, and include them in the closing costs before your closing date. As for utilities, contact your utility and ensure that upon transferring the unit into your name, that any previously incurred costs are charged to the original owner.FurnitureAccording to Statistics Canada, the average Canadian household spent $2,300 on furniture and other related supplies. Graduating from a condo to a house? You’ll need more stuff, so expect to open your wallet a bit more this year.Even more costsBut wait, there’s more costs to go over!We’ve gone over all the mandatory costs you have to pay, but then there are non-standard and elective ones we haven’t touched on yet. For example, GST/HST charges. Some home purchases are subject to a sales tax. These are typically added to sale of newly-built homes and not on resale properties. Not all provinces apply a sales tax, and you might be eligible for a tax rebate if you do end up paying tax.Also, when you’re approved for a mortgage, your bank may offer you life insurance. It’s an additional cost that’ll get tacked on to your monthly mortgage payment and it’s purely optional. With a benefit of up to $500,000 to be put towards your mortgage in the event of your death, mortgage life insurance does offer some peace of mind.New construction homes are also covered by a warranty program, and these fees could be incorporated into the purchase price or could be due at closing — make sure to find out if this is the case. There could also be enrollment fees and solicitors fees owed to the builder.And don’t forget the fees that are likely to come up on moving day: you’ll need to pay the movers (you might even opt for moving insurance), not to mention all the service people who will charge fees for hooking-up various utilities.Down paymentWhat is a down payment?There’s a good chance you won’t be paying for your new home all at once, in cash — it’s much more likely that you’ll be taking out a mortgage loan from a bank to pay the seller, and spending a lot of time paying that loan off in monthly installments.Legally, however, a mortgage cannot be used to cover the entire cost of your home. To secure the home that you want, you’ll also need to give its seller a down payment — a large chunk of money that a buyer provides upfront — on top of your mortgage funds. The down payment is then deducted from the price of your home.Down payments cannot be financed by your mortgage. They can be financed by other types of loans, though taking out any loan to finance a down payment can be a risky move that should be approached with caution.How much should you put towards your down payment?It’s kind of up to you how much money you put towards your down payment. But it’s not really as simple as laying down a twenty and calling it a day.In Canada, there’s a minimum percentage of the purchase price you need to contribute to your down payment. The minimum is a percentage of the total purchase price of your home, and that percentage will vary depending on which price bracket your home falls into.The following are the price brackets and down payment sizes required for each, as outlined by the government of Canada:A home that costs $500,000 or less — 5% of the purchase priceA home that costs $500,000 to $999,999 — 5% of the first $500,000 of the purchase price, and 10% for the portion above the purchase price above $500,000A home that costs $1 million or more — 20% of the purchase priceOf course, it’s generally advisable to put as much money as possible into your down payment — the more you put towards your house upfront, the smaller your mortgage — and interest payments — will be.What’s the 20% rule?Another reason to put down a bigger down payment? A Crown corporation called the Canada Mortgage and Housing Corporation (CMHC).By law, if your mortgage will be covering more than 80% of your home’s purchase price, that mortgage needs to be insured by the CMHC. In other words, if your down payment covers less than 20% of your home’s purchase price, you’ll need to pay insurance premiums for the duration of your mortgage period, on top of everything else.The premium you’ll get charged is based on the size of your down payment — the CMHC has a calculator on its website that you can use to figure out what your premium rates will be.Note that even premiums on the lower end of the price scale could still add thousands of dollars to the overall cost of your home.How big should your down payment be?A bigger down payment can spare you from the CMHC’s insurance premiums, but sometimes, it’s just not feasible — and that’s okay.As always, assess your budget to figure out a comfortable amount of money that works for you. And as we mentioned, we recommend against borrowing money for your down payment.What is the Home Buyers Plan (HBP)? Is it right for me?The HBP essentially allows you to borrow money from your Registered Retirement Savings Plan (RRSP) to finance your home.To understand the benefits (and limits) of this route, you’ll first need to understand how an RRSP works.For many Canadians, contributing to an RRSP is their main strategy for building a retirement fund. An RRSP is especially beneficial for people who are earning on the higher end of the income spectrum, since it functions as a temporary tax shelter: any money you contribute to your RRSP is not taxable until you withdraw it. That allows you to defer income taxes on that money into retirement, when your taxes may be much lower.The key words here are “until you withdraw it.” Any time you take money out of your RRSP, it’s subject to taxation.The HBP is great because it lets you withdraw money from your RRSP without getting taxed. You can withdraw up to $25,000 for yourself to use toward buying a home, or you can withdraw it and gift it to a child with a disability. The catch is that your withdrawal will count as a loan, rather than a regular withdrawal — the Canadian government gives HBP participants up to 15 years to put the money back into your RRSP.The biggest factor for deciding whether the HBP is right for you, is whether you’ll be able to keep up with the repayment schedule. But there are other considerations, too. Check out the Canadian government’s HBP FAQ to find out more.Home InsuranceWhat it doesYou’ve just dropped hundreds of thousands of dollars on your first home. You probably feel elated, and possibly also… mild terror. A home is likely the most expensive investment you’ll make in your life, and if anything bad happens to it, you’ll have to drop even more money repairing the damage — and possibly even risk depreciation.Enter homeowner’s insurance. A basic policy will protect both your belongings as well as the physical structure of your property, and covers theft, damage, and the personal liability of you (the policyholder), your partner, and your children.What it doesn’t do A basic policy can only do so much for you. Among the things it won’t cover is flood damage, earthquakes, the theft of high-value items like jewelry or art, regular maintenance, and hazards that you could’ve technically planned for. Fortunately, with the exception of maintenance, most insurers offer add-ons to cover these things.How do I get it?As with any type of insurance, the best policy is to do your research and shop around for the best rates. At LowestRates.ca, we offer a home insurance quoter to make the task easier. After you’ve filled out the form, we’ll scan the market for you and give you up to ten quotes customized to your situation.What if I rent out my property?Homeowner’s insurance is for people who will be living in and caring for the insured property. If you plan to rent out your home to someone else, what you need is income property insurance — not homeowner’s.Why?For all the same reasons you would want homeowner’s insurance: to protect your property. As a landlord, you’re also at greater risk for a liability claim, so you’d need more liability coverage than if you were simply a homeowner. Income property insurance will also offer you the option of covering less of your belongings — and if you’re not living on the insured property, chances are, few of its furnishings will belong to you.And the renter?To protect their belongings, they’ll need renters insurance.House huntingWhere do I start?Believe it or not, the house hunt begins before you actually start hunting for houses — it starts with a checklist. Before getting a real estate agent or looking at houses online, you need to decide on your ‘needs’ and your ‘wants’. In order to stay on track, you need to know which items on your list you absolutely cannot budge on and the items that you’ll be able to survive without, as much as you wish you could have it all. For example, a need could be location if it’s important for you to live near work or good schools, whereas a want could be a huge walk-in closet.Real estate agent versus websitesBuying your first home is an overwhelming experience, and it’s in your best interest to have someone in your court. When it comes to house hunting, that person is a real estate agent. Real estate agents will find you exclusive listings you wouldn’t be able to find by yourself online, they can quickly answer your questions about the current market, they are skilled negotiators, and ultimately — if they’re good — they’ll stop you from entering a bad deal.If you’re really against having a real estate agent and you’d rather tough it out alone, there are plenty of resources out there that can help you out, including online websites that post listings. If you want to be very thorough, you can combine websites and get a real estate agent.Choosing the right neighbourhoodMost people know what municipality they want to live in based on their job location and proximity to family and friends. However, choosing the right neighbourhood takes a lot more thought. When you start to feel overwhelmed, refer back to your checklists of ‘needs’ vs ‘wants’ and start there. While everyone’s “wish lists” look different, here are some helpful pointers to get you started. Once you prioritize, you’ll be able to narrow down your search.Type of home you wantProximity to workProximity to transitAccess to schools and daycareAccess to trails, parks and outdoor spaceAccess to retail and grocery storesGeneral walkabilityOverall safetyBidding warsYou never thought this day would come, but, you’ve finally found ‘the one’ and now, with the help of your real estate agent and lawyer, it’s time to put in an offer. If the stars are on your side, the seller will accept your offer and you’ll officially be the proud owner of your very first home!But it isn’t always that easy. You could find yourself in a bidding war — which occurs when multiple buyers put in offers to compete for the same property. You won’t know what others are offering and the seller will accept whichever offer they want without providing a reason why — talk about adding even more stress to your house hunt.To encourage multiple offers on a property, the selling agent will indicate that offers should be submitted on a certain date in hopes that a deadline will get a bidding war started. However, some eager buyers will submit an offer at any time, known as a “bully offer” with the goal of enticing the seller to accept before seeing other offers.If you do find yourself in a bidding war, our advice is to keep your cool and know your maximum budget. After all, this stressful situation can cause even the most level-headed buyers to make a rash decision that could be detrimental.The closing costsBuying a house is more than just being able to afford the mortgage payments and condo fees. To put it simply, homeownership has a lot of extra costs. Here are the most common closing and after-closing costs to be prepared for:Home inspection feesA home inspection is an in-person inspection of a home’s overall condition and structure and it’s something every homeowner should spend money on. Although it’s not legally required, it could save you big money in the long run since an inspection will examine major elements of a home, reveal potential issues, and a ballpark cost of repairs. Typically, home inspection costs will range from $300 - $600 depending on the size and type of home.Land transfer taxesLand transfer taxes are calculated based on the purchase price of the home and will vary by province. Some cities such as Toronto also have a municipal land transfer tax. The good news for first time home buyers? You may be eligible for a full or partial refund on land transfer taxes in some provinces.Legal feesWorking with a real estate lawyer as soon as you want to put in an offer on a home is important. Why? Your lawyer will be able to help you review your offer, explain the legal terms in plain language, and help with the legal work required on closing day. You’ll need to pay for your lawyer’s time and expertise, as well as disbursements, which are any expenses they incur, such as registrations and supplies that are required. This is an average, but legal fees can cost between $1,000 to $2,500.What you need to know about renovationsMany Canadians choose to do some renovations after buying their home, especially if you’re buying a resale.The good news is that there are a number of incentives to help lower renovation costs. But it’s important to understand what projects are covered, and how much you’re eligible to claim. Knowing all that will help you budget better.If you’re a homebuyer who is 65+ before the end of the tax year or someone who has a disability, you could be eligible for the Federal Home Accessibility Tax Credit (HATC). The tax credit is non-refundable, and you can claim up to $10,000 for any projects that improve accessibility or safety in your home — this includes guide rails, ramps, special bathtubs and larger doorways.Individual provinces in Ontario also offer their own home renovation tax credits. Ontario, B.C., New Brunswick and Quebec residents can all take advantage of provincial tax credits for home renovations.If you’re hiring contractors, protect yourselfSome home renovation projects are beyond the scope of non-professionals, which means hiring contractors to do the work.It’s important that you understand the risks that come with hiring a professional to do work on your home. Any project should begin by contacting your home insurer and filling them in on the work that you’ll be doing. You may have to purchase additional coverage to ensure that if anything goes wrong, you’ll be covered on your end.It’s also very important that whoever you hire to do the work also has their own insurance coverage. The contractor should have their own commercial general liability policy so that if there’s any damage to your own, they can make a claim and reimburse you.Tax credits and youLuckily for you, buying your first home comes with some nice tax breaks. While you won't necessarily qualify for all the breaks available to you, we've listed all the home-buying related tax credits you should be aware of when it comes time to file your claim.The Homebuyers ' amount on Line 369If you're a first-time home buyer, you can claim up to $5,000 on your taxes when purchasing your first home. This is the First-Time Homebuyers (FTHB) Tax Credit. If you have a disability, you can actually claim this amount everytime you buy a home. There are some requirements on both fronts, however.The home must be owned by you, or your spouse/common-law partnerThe buyer has not lived in another home they owned in the year of purchase, or within the previous four yearsAll the following property types fall under the FTHB tax credit:single-family housessemi-detached housestownhousesmobile homescondominium unitsapartments in duplexes, triplexes, fourplexes, or apartment buildingsGST/HST new housing rebateThis credit can be claimed if you intend to make the house you're buying your primary residence (or the primary residence for a close relation). You can claim this if:You bought a new house, constructed a new house, or renovated a houseBought shares in a co-operative If your home was built or renovated, the fair market value of the property has to be less than $450,000This rebate varies between provinces — for more info, read the full guide here.Line 398 – Home accessibility expensesAs mentioned, if you're renovating your home to accommodate either a senior (65+) or a person with a disability, you can potenitally claim a renovation tax credit as a medical amount.Pay careful attention to what qualifies, however:The renovation allows an individual to access, or be more mobile/functional within their homeRisk of harm or injury is reduced to the qualifying individualIf you perform the work yourself, you may be able to claim expenses for:the cost of building materialsfixturesequipment rentalsbuilding planspermitsHowever, you won't be able to claim tools or your labour. Some other expenses that can't be claimed:financing costs for the renovationany renovation costs incurred mainly to increase or maintain the value of the propertyany routine repair or maintenance of the upgradescost of household appliances housekeeping, security monitoring, gardening, outdoor maintenance, or similar servicesLine 219 – Moving expensesIf you're buying a home as part of a move either for work or for education, good news — you can claim your costs.The only catch is that the move has to bring you 40 kilometres closer to your new work or school.Home business tax breaksIf you're using your new property as both a residence and for your home business, you can claim tax breaks. The cost of your mortgage and utilities are among the costs you can claim when filing.However, you should note that the amount you deduct can't exceed your business's net income. Additional links and resources:If you still have questions and they weren’t answered in our guide, we’ve listed some resources below that are useful for both first-time and experienced homebuyers. We also advise reaching out to real estate agents, property managers or real estate lawyers for questions that are very specific to a certain property — they’ll be able to provide you the tailored answers you need.The LowestRates.ca Mortgage CalculatorCMHC Mortgage Loan Insurance OverviewThe Canadian Real Estate AssociationCREA National Average Price MapHousing Market Outlook: Canada EditionTREB Land Transfer Tax CalculatorCanadian Home WorkshopNew B-20 Mortgage Rule Guidelines

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