Your first home can seem like a daunting purchase.

Welcome to our First Time Homebuyer’s Guide, your go-to resource for all things related to purchasing your very first home. We’re here to ensure you’re well-equipped with the knowledge you need to make informed decisions.

If you're considering whether to work with a mortgage broker or go directly to a bank, take a look at our nine compelling reasons why having a mortgage broker by your side is a smart choice. Mortgage brokers are invaluable partners in your journey to home ownership.

WHAT DETERMINES A FIRST TIME HOME BUYER

A first-time home buyer is someone who is buying their first home. In Canada, if you're buying your first home, you might qualify for different incentives, which we'll look at more closely next. Usually, to be considered a first-time home buyer in Canada, you need to:

• Have never owned a home before

• Be a Canadian citizen, a permanent resident, or a temporary resident with a work permit

• Plan to live in the home as your main residence

Also, some programs offer help to people who used to own a home but are in a situation similar to first-time buyers. For example, if you were married, owned a home with your spouse, and are now divorced, you might still be seen as a first-time buyer under certain conditions.

INCENTIVES FOR FIRST TIME BUYERS

In Canada, if you're buying your first home, you can take advantage of several financial help programs. These programs are offered at different levels: federal, provincial, and local, depending on where you live.

FEDERAL PROGRAMS:

The Home Buyer’s Plan (HBP)

The Home Buyer’s Plan allows first-time buyers to use money from their Registered Retirement Savings Plan (RRSP) to purchase or build a home. Normally, withdrawing early from an RRSP incurs extra taxes, but the HBP allows this without penalties.

You can withdraw up to $60,000 from your RRSP, and if you're buying with a partner, each can withdraw the same amount, totaling $120,000. The withdrawals can come from multiple RRSP accounts, except from group or locked-in RRSPs. This withdrawn amount isn’t considered taxable income, but it must be repaid to your RRSP within 15 years.

First Home Saving’s Account (FHSA)

The FHSA is a special savings plan for first-time homebuyers, allowing them to save up to $40,000 ($8,000 per year) for their home without paying taxes on the savings. Like an RRSP, contributions to an FHSA are tax-deductible in the year you make them. You can withdraw the money tax-free when buying or building your first home. If you don't use the funds, you can transfer them tax-free to an RRSP or RRIF. Unlike the RRSP, it does not need to repaid.

To qualify for the HBP or FHSA in Canada, you need to meet these requirements:

1. First-Time Home Buyer: You must be buying or building your first home.

2. Agreement in Place: You need a written contract to buy or build a home for yourself or a family member with a disability.

3. Residency: You must be living in Canada when you take money out of your RRSPs for the HBP and continue to live in Canada until the home is bought or built.

4. Move-In Plans: You must plan to live in the new home as your main residence within one year after purchase or construction. If the home is for a family member with a disability, they must plan to live there as their main residence.

First-Time Home Buyer’s Tax Credit

The First-Time Home Buyer’s Tax Credit is a federal incentive that allows new homebuyers to claim a tax credit of up to $5,000 for purchasing a home in a given tax year. This credit is also known as the “Home buyer’s amount” or “Line 31270.”

To qualify, two conditions must be met:

1. You (or your spouse/common-law partner) bought a qualifying home.

2. You did not live in another home owned by you (or your spouse/common-law partner) in the year you bought your new home or in any of the four preceding years.

A qualifying home must be located in Canada and registered in your or your spouse’s name. It can include various types of homes, such as single-family homes, mobile homes, and condos.

PROVINCIAL PROGRAMS:

Property Transfer Tax Rebates:

First-time homebuyers can benefit from property transfer tax rebates at the provincial and municipal levels. Property transfer taxes (also known as land transfer taxes) are paid by the buyer to local governments. Here’s how the rebates work in different provinces:

• British Columbia: Many first-time homebuyers can get a full exemption from the property transfer tax. To qualify, you must have lived in BC for at least a year or filed at least 2 income tax returns in BC within the past 6 years. The property must be no larger than 0.5 hectares and have a market value of $500,000 or less.

• Ontario: First-time buyers in Ontario who have never owned a home anywhere in the world can get a refund on the land transfer tax. They pay no land transfer tax on the first $368,000 of their home’s value. The maximum refund is $4,000 if the home’s value exceeds this amount.

• Prince Edward Island: Eligible buyers in PEI can get a full exemption from the property transfer tax. This is available to Canadian citizens or permanent residents who have never owned a principal residence. Buyers must have lived in PEI for at least 6 months or filed income tax there in at least 2 of the past 6 years.

In some cities, like Toronto, you might also need to pay a municipal land transfer tax, but there are often rebates available for first-time buyers.

Other Tax Rebates:

If you buy a newly built or substantially renovated home, you may be able to claim a GST/HST rebate. This rebate isn’t just for first-time buyers, but it’s still a valuable incentive. The rebate amount varies by province, so check your eligibility if your home is new or newly renovated.

UNDERSTANDING DOWN PAYMENTS AND DEPOSITS

A down payment on a home represents a portion of the total purchase price. The minimum down payment required varies based on the price of the home: 5% for homes up to $500,000, 10% for the portion of the price between $500,000 and $999,999, and 20% for homes priced at $1 million or more.

The deposit is provided when you make an offer to purchase, showing your commitment to the transaction. This deposit is held in trust and is later applied towards your down payment when the sale closes. The deposit not only secures your offer but also demonstrates to the seller that you are serious and financially prepared to proceed with the purchase. HERE are tools available to help first-time buyers save for their down payment.

CLOSING COSTS AND FEES TO BUDGET FOR

Aside from the down payment, it’s crucial to allocate funds for associated fees when purchasing a home. Around 1.5% of the purchase price should be earmarked for these costs. They include:

• Mortgage Default Insurance: For purchases with less than 20% down, a mortgage default insurance premium (CMHC fee) is required. This fee is included in the mortgage and does not require an out-of-pocket payment.

• Property Transfer Tax (varying by province) here is a great link to help you calculate the cost https://wowa.ca/calculators/land-transfer-tax

• Legal Fees: Expect around $1500-$2000 for registering the mortgage on the title and transferring it into your name.

• Title Insurance: This will cost around $300-$350 and will be purchased by the lawyer/notary.

• Appraisal: In some cases, the lender may need an appraisal to ensure the home's market value. This can cost $400-$600.

• Home Inspection: We highly recommend hiring a home inspector, with an average cost of $500-$600, to protect your investment.

• Home (Fire) Insurance: This is mandatory with any mortgage and may range from $1500 to $3000+ per year. We can connect you with a company offering competitive rates.

• Municipal property taxes: This amount will vary based on the home’s value, location, and municipal tax rates.  It may be possible to have your mortgage lender add a property tax payment to each mortgage payment, or you can pay to the municipality directly.  Any payments we quote you are for mortgage principal and interest only, and do not include property taxes as this is calculated by the lender after your mortgage funds.

CRUTIAL CREDIT INIGHTS

Mortgage lenders typically require at least two sources of credit with limits of $2,000 or more. Timely payments hold paramount importance, especially within the most recent two years. Maintaining a good credit history is essential for securing favourable mortgage terms.

For an in-depth understanding of how credit scores work and their calculation, check out our informative content on credit scores. This comprehensive guide will help you understand the factors influencing your credit score and how you can improve it.

We highly recommend taking a moment to review your credit report regularly. This proactive step can help you identify any discrepancies or areas needing improvement before applying for a mortgage. Here is a handy link to help you get started on reviewing your credit report.

MORTGAGE PRE-APPROVAL

It's never too early to get pre-approved for a mortgage. Even if you're not ready to purchase yet, obtaining a pre-approval gives you a clear picture of your current financial standing and helps identify any steps you may need to take to reach your homeownership goals. Here's how you can get started with us:

Step 1: Complete Your Application

Start your pre-approval journey by filling out our easy online application form or completing the application over the phone with one of our knowledgeable brokers. This initial step gathers essential information about your financial situation, employment history, and the property you're interested in.

Step 2: Upload Supporting Documentation

Once you've submitted your application, our system will automatically prompt you to upload the necessary supporting documents based on your responses. Some may include:

• Paystubs

• T4’s

• T1 Generals

Having these documents ready helps expedite the pre-approval process and ensures a more accurate assessment of your borrowing capacity.

Step 3: Understand Your Income Sources

Different income sources can impact your mortgage qualification in various ways. Our comprehensive Income Guide provides detailed insights into what lenders look for, helping you understand how your income will be evaluated.

Step 4: Gather Required Documents

To streamline your application process, refer to our Required Documents list. This checklist ensures you have all the necessary paperwork organized and ready for submission, reducing delays and enhancing the likelihood of a smooth pre-approval process.

UNDERSTANDING YOUR MORTGAGE QUALIFICATION

Understanding mortgage qualification is crucial when embarking on your journey to homeownership.

When it comes to mortgage qualification, two primary calculations are crucial: Gross Debt Servicing (GDS) and Total Debt Servicing (TDS). These ratios assess your ability to manage mortgage payments alongside other financial obligations.

Gross Debt Servicing (GDS)

GDS measures your core housing expenses, including your mortgage payment (factoring in the stress test rate), property taxes, heating costs, and strata fees, if applicable. Lenders generally prefer your GDS ratio not to exceed 39% of your gross monthly income.

Total Debt Servicing (TDS)

TDS takes a broader look at your financial obligations, incorporating all housing expenses plus other debt payments like credit cards, lines of credit, car loans, and support payments. Ideally, your TDS ratio should stay within 44% of your gross monthly income.

What is the Stress Test?

The stress test is a tool used by lenders to ensure you can afford your mortgage payments even if interest rates rise. It involves assessing your mortgage eligibility at a rate that is 2% above your contract rate or the benchmark rate of 5.25%, whichever is higher. This precaution helps safeguard against future financial strain due to potential rate increases.

PROPERTY CONSIDERATIONS

Certain property types can significantly impact your financing options. Lenders typically favor well-maintained, marketable properties. If properties you may be considering have any of the unique features listed below, please let us know. These characteristics will influence which lenders we can approach for your financing needs.

• Alternative Waste Systems: Includes options like holding tanks or lagoons.

• Non-Municipal or Well Water Sources

• Multiple Titles or Lots

• Fair or Poor Condition of the Home

• Wood Foundations

• Mobile/Manufactured Homes

• Large Acreages: Many lenders will only include a maximum of 10 acres in the value of the home

• Outbuildings: Lenders may not use secondary structures such as barns or workshops in the value of the home.

MORTGAGE RATES AND TERMS

Once your pre-approval is in place, you will receive a detailed email from us outlining the amount you are approved for and any other relevant information. Additionally, a rate hold will be established for you.

When it comes to mortgage rates, you have the option of selecting either a fixed rate or a variable rate:

• Fixed Rate Mortgage: This option provides a set interest rate for the term of your mortgage, ensuring that your payments remain constant.

• Variable Rate Mortgage: With this option, you receive a discount for five years off the prime rate, which is determined by the Bank of Canada. As the prime rate fluctuates, so does your mortgage rate. Depending on the lender, your payments may vary, or the payments may remain the same while your amortization period adjusts.

For more information on fixed versus variable rates, please refer to our info sheet.

If you choose a fixed rate, you can lock it in for a term ranging from 1 to 5 years. While a 5-year term has traditionally been the most popular option, in some cases, a shorter term may be more beneficial.

Key Topics to Discuss with Your Mortgage Broker

Once you receive your pre-approval we recommend discussing some of the below mortgage characteristics with us:

1. Amortization & Term Length: Understand the duration of your mortgage and how it impacts your payments.

2. Payment & Pre-payment Options: Learn about your payment schedule and options for making additional payments.

3. Fixed vs. Variable Rates: Discuss the pros and cons of each type of interest rate.

4. Penalties for Breaking Your Mortgage Early: Be aware of any fees or penalties if you need to break your mortgage term early.

IN CONCLUSION

As you embark on this exciting journey towards homeownership, keep these key takeaways in mind:

• Partner with Your Mortgage Broker: They are your trusted advisor, guiding you through the mortgage process.

• Get Pre-approved: This step simplifies your home search by clarifying your budget.

• Know Your Affordability: Understand what you can comfortably afford.

• Familiarize Yourself with Closing Costs: Be prepared for additional expenses beyond the purchase price.

Next Steps

Now that you're ready to start house shopping, it's an ideal time to engage a realtor. A good realtor can help you find the perfect home and navigate the buying process. We have a network of recommended realtors across the country, so feel free to ask us for referrals.

Embark on your home-buying journey with confidence and support. Happy house hunting! ENSURE TO DOWNLOAD OUR GUIDE - 8 STEPS TO PURCHASING A HOME