Buying a home is one of the biggest purchases many Canadians will make in their lifetime. The process can be exciting and overwhelming which is why it’s recommended that proper planning and consideration is taken. We hope to take the stress out of the equation by providing you with key steps and guidance.
Your Down Payment
Over the years of employment, you’ve stuck to your budget and have had the opportunity to build a big enough down payment upon which you can now utilize. The down payment is defined as the amount of money that you will put towards the purchase of your home and is deducted from purchase price. The rest of the purchase price is funded by a mortgage.
Example: Over the years of working at Loblaws, Jennifer has managed to build a down payment of $150,000. She is looking to purchase her dream home which is valued at $500,000. Jennifer’s down payment is $150,000 and the rest of the purchase price will be financed by a $350,000 mortgage.
| Purchase price of your home | Minimum amount of down payment |
|---|---|
| $500,000 or less | 5% of the purchase price |
| $500,000 to $999,999 | 5% of the first $500,000 of the purchase price10% for the portion of the purchase price above $500,000 |
| $1 million or more | 20% of the purchase price |
The size of your down payment is dependent on the purchase price of your home. If your down payment is less than 20%, than you would have to purchase mortgage loan insurance. According to the Canada Mortgage and Housing Corporation (CMHC), mortgage loan insurance helps protect lenders against mortgage default. Mortgage loan insurance is not free and often you would end up paying a premium on top of your monthly mortgage payment.
When buying a home, it’s recommend that your minimum down payment is at least 20% before you decide to purchase your home in order to avoid mortgage loan insurance. The down payment should be easily accessible and your debt obligations such as credit cards should be at a minimum.
Financing Your Down Payment
Buying a home could be challenging at times especially if you don’t have a big enough down payment. We know that saving for the down payment is hard, especially when the salary levels stay the same and expenses keep increasing. However, keep in mind to take advantage of various government programs and investment vehicles that are available at your finger tips. Depending on your time horizon, saving for the down payment could be accelerated by investing and taking advantage of tax deferring vehicles.
Utilize a Tax Free Savings Account – A tax free savings account as the name says it, allows you to invest tax-free, up to your TFSA limit. Funds inside a TFSA are eligible to be withdrawn and be used towards a purchase of a home.
Utilize a Registered Retirement Savings Plan – RRSPs are meant to help you save for retirement. Funds deposited into an RRSP allow you to claim a tax deduction in addition to them being able to grow tax free. Funds inside an RRSP are meant to be withdrawn in retirement but you may also withdraw up to $35,000 for the purpose of buying a home, under the Home Buyers’ Plan.
Utilize Savings and Investments – Your down payment should be easily accessible and in short term investment instruments such as Guaranteed Investment Certificates. Having your funds easily accessible could come in handy when you spot your dream home.
How Much Can You Afford?
Before buying a home, whether house or a condominium, it’s important to do a mortgage pre-approval. Often, a mortgage is the biggest loan that the majority of people get in their lifetime which is why it’s important to take a step-by-step approach. Mortgages can either be fixed or variable. A fixed mortgage has a “fixed” interest rate that is charged for the duration of the loan while a variable rate fluctuates based on an underlying rate such as the prime rate. However, by working together with a mortgage broker, not only will you be able to understand the mortgage process but you will know exactly how much you can afford.
Mortgage brokers have a wide network of banking professionals and lenders. They’re able to provide you with a wide range of mortgage rates to choose from at no cost to you as mortgage brokers are paid a commission from the lender.
To begin the process of knowing how much you can afford, the mortgage broker would ask you to provide a list of documents that will enable you to get the best rate such as:
- Job Letter
- Current Paystub
- Notice of Assessment and Personal Tax Returns for Last 2 Years
- Proof of Down Payment Amount and Source
- Credit File & Score
- Details of Existing Debts and Financial Obligations
- Mortgage Application
- Government Issued ID
It’s important to gather these documents ahead of time in order to make the process smoother. As well, be aware when applying for a pre-approval, you may be given the option to purchase insurance such as mortgage, critical illness, disability or employment. These insurance policies are there to protect the lender and provide a payout if you lose your job, become disabled, critically ill or die. Insurance would mean extra cost to you.
Working with a Realtor
When buying a home, its recommended that you work with a Realtor, a specialist determined to make the process as easy as possible. In addition to being up to date with rules and regulations of the real estate landscape, a Realtor negotiates on your behalf, files paperwork and provides you with information that allows you to make an informed decision, whether it’s comparable prices, neighborhood trends, housing market conditions and much more.
It’s important to note that when working with a Realtor, the seller of the property pays the Realtor’s fees when you buy a home. The fee is typically 5% of the purchase price where 2.5% goes to the listing realtor and 2.5% goes to the buyer’s realtor.
Closing Costs When Buying a Home
When buying a home, in addition to the costs of obtaining a mortgage, you have to be mindful of the closing costs which could be between 1.5% to 4% of the home’s purchase price. These costs are often paid on the date that keys exchange hands, also known as the closing date.
Legal Costs – In addition to establishing a relationship with a mortgage broker and realtor, it’s important to hire a lawyer who has your best interest at heart. The lawyer is responsible to review your purchase of sale, search title on the property and switch ownership of property on your behalf in the land titles system. The legal fees typically range from $500 to $3,000 but will vary depending on your lawyer’s rates.
Home Insurance – When you obtain a mortgage, part of the condition is that you must have home insurance. Home insurance is there to protect you and your family if the unexpected were to happen. Speak to an insurance agent in order to get a quote ahead of time.
Land Transfer Tax – In order for your lawyer to register the property under your name, they will ask you to pay land transfer tax. The land transfer tax is a percentage of the home’s purchase price and varies depending on which jurisdiction you’re in.
Example: Jim is buying a home in Toronto for $500,000. The land transfer tax is 1.5%. of the purchase price meaning that Jim has to pay $7,500.
To calculate the land transfer tax when buying a home, we recommend you use an online calculator or confirm with your realtor.
Adjustment Costs – Upon closing, there will be adjustments costs that may overlap with the seller. For example, the seller may have already paid or prepaid property tax, hydro, maintenance costs, etc. In this case, the seller would receive credits on the closing date to cover these payments. Ask your lawyer if there are any adjustment costs.
New Build – If you’re buying a home that’s a new build, keep in mind that you may be forced to pay HST on top of the purchase price. Make sure you ask if the GST/HST is included in the purchase price.
Home Appraisal Fee – As part of the pre-approval process, mortgage brokers may require you to do a home appraisal on the property that youre looking to purchase. Appraisal fees vary from $300 to $500.
Home Inspection Fee – When buying a home, ask your Realtor if its necessary to include a home inspection clause. It’s recommended that the clause is added when you want to inspect the home’s electrical, plumbing, foundation or roofing structure in detail.
Moving Costs – be aware of any moving and storage costs.
Tax Credits for Home Buyers
When buying a home, tax credits are offered to Canadians at the provincial or federal level.
First Time Home Buyers Amount – If you’re buying a home for the first time, the government is offering you a total tax rebate of $750 which may not seem like a lot but every little amount adds up.
Land Transfer Tax Rebate – In certain cities and municipalities, you may get a rebate on the land transfer tax if you’re a first time home buyer.
GST/HST – If you paid GST or HST when you bought your home, you may be eligible for a rebate.
Moving Expenses – If your purchase of a home caused you to move, you may be able to deduct eligible expenses associated with the move. Speak to your accountant to see if you qualify.
Buying a home is the biggest purchase of your life. Its important to do your homework and prepare ahead of time. Follow a budget, save as much as you can by taking advantage of tax-deferring investment vehicles and make sure that you establish connections with a reputable mortgage broker, realtor and lawyer.