Everything you need to know about buying your first home

Buying a home is a dream for many Canadians, but it’s not something that’s done overnight. Saving a down payment can take years, and finding the right home can also be a lengthy process. The best thing you can do to prepare is to research as much as you can. With the right information, you’ll be able to make a smart decision. From securing a mortgage to finding the right real estate agent, here’s a step-by-step guide on how to buy a home in Canada.

1. Decide if homeownership is for you

There’s no denying that homeownership is a goal for many people, but are you ready for it? Owning a home usually comes with higher costs and maintenance than you might expect, so weigh the pros and cons of renting versus owning.

Pros and cons of renting

Pros

• There’s less maintenance

• The monthly costs are lower

• It’s a short-term commitment

• You could use savings to invest

Cons

• There’s limited ability to paint or renovate

• Monthly rent can increase every year

• Your landlord can terminate your lease

• You’re not building any equity

Pros and cons of owning

Pros

• You can renovate your home as you see fit

• You’re building equity

• There’s no chance of being booted out

• There’s potential for rental income or increased property value

Cons

• You’re responsible for all maintenance and repairs

• There are additional monthly costs like property taxes, insurance, and more

• There’s always a chance that your property could decrease in value

• You’ll eventually need to do costly repairs

As you can see, there are pros and cons of both renting and owning. Quite often, home ownership advocates will argue that monthly ownership costs will be similar to rent. But it is rarely that simple. Some costs to consider when buying a home include:

• Upfront costs — Not only do you need money for a down payment, but you’ll also need some funds for closing and furnishing your home.

• Ongoing costs — Mortgage payments, maintenance fees, property taxes, insurance, and utility bills can add up to quite a bit.

• Major expenses — As a homeowner, there will be times where you need to pay for major expenses such as a new roof, new appliances, a new furnace, and more.

• Your time — Don’t forget, your time is valuable. As a homeowner, you’re responsible for all the maintenance, be it shovelling snow, mowing the lawn, or doing any repairs.

2. Get financially ready

You’ve considered the pros and cons and have decided you’re ready to own. Before you start browsing online for listings, you want to ensure that you’re financially secure to avoid becoming house poor.

Save for a down payment

When buying a home in Canada, you need to have a down payment of at least 5%. So, if you’re looking to buy a home that costs $500,000, you would need at least $25,000 on hand.

While 5% down is the bare minimum, many people strive for 20% since they’ll avoid having to pay mortgage loan insurance. The idea of an added insurance premium doesn’t sit well with some people, but it protects lenders if there’s ever a default. The good thing is, this extra cost can be paid upfront or added to your mortgage loan. One final thing to consider is there are now some companies looking to disrupt the housing market by offering down payment assistance!

Get a pre-approved mortgage

Another essential thing to do before you start house hunting is to get a pre-approved mortgage. This is a pretty straightforward process; lenders will look at your credit score, current debt, down payment, and income to determine how much they’re willing to lend you and at what interest rate. With that number in hand, you can determine what you can afford.

While pre-approvals seem promising, they’re not a guarantee. Lenders will appraise the home you purchase before releasing any funds. If your lender thinks the property is worth less than what you paid, they may not approve you for the total amount.

Understanding how mortgages work is also vital when searching for a home, so be sure to check out our detailed guide on how mortgages work.

Use the Home Buyers’ Plan

If you have any money invested in your Registered Retirement Savings Plan (RRSP), you can withdraw up to $35,000 tax-free as part of the Home Buyers’ Plan (HBP). Taking advantage of the HBP can be great for people who are looking to increase their down payment. However, there are a few conditions to qualify:

• You must be a resident of Canada

• You must not have owned a home in the last four years

• You must have a written agreement to buy a home

• The home you’re purchasing must be your primary residence

• You can only withdraw funds that been in your account for at least 90 days

You’ll also need to repay 1/15 of the funds you withdrew every year, starting in the second year after purchasing your home. For example, if you withdrew $30,000 from your RRSP in 2021, you’d have to repay $2,000 every year starting in 2023. If you don’t repay, the funds would be considered taxable income and you’d permanently lose that contribution space as well.

"Generally speaking, you don’t want your monthly housing costs to exceed 32% of your average before-tax income."

Make a budget

With your down payment and pre-approved mortgage, you’ll also want to figure out what your budget will look like once you own a home. Generally speaking, you don’t want your monthly housing costs to exceed 32% of your average before-tax income. This calculation is known as the gross debt service (GDS) ratio. When doing the math, include housing costs like:

• Your monthly mortgage

• Property taxes

• Utilities

• 50% of any condo fees

Your GDS ratio is important if your down payment is less than 20% since CMHC, the primary mortgage loan insurance provider, requires your ratio to be 35% or less to qualify for an insured mortgage. It’s also worth mentioning that if you have any additional debt such as credit cards or car loans, your total debt service (TDS) ratio, which includes your GDS, should not exceed 40%.

Keep in mind that when lenders qualify you for a mortgage, they’re only factoring in expenses associated with a home. They’re not considering the cost of raising kids, hobbies, vacations, retirement savings, or anything else. In other words, you may not want to borrow the entire amount that’s offered to you. Make a budget based on your lifestyle, and you’ll know what you can truly afford.

3. Find the right home

With your finances in order, this is where things get real. You can start looking for a home yourself, but it helps to have the right team and knowledge to guide you through the process.

Get a real estate agent

Most people will need to work with a real estate agent to help them find their first home. This will likely be the largest purchase of your life, so you’ll want to work with a professional. For that reason, you should use a full-time agent, regardless of the discounts a part-time one may offer.

Finding a good agent can take a bit of time. You can start by getting a referral from a friend or family member. Whoever you find, interview them first to make sure they’re a good fit before you sign. Ask things like how long they’ve been in the industry, if they’re familiar with areas you’re interested in, and what you can expect when working with them.

Figure out what kind of home you want

Before you start booking viewings, you should narrow down your choices by deciding what you want from your home. Some things to consider include:

• Location — Do you want a home in the city or the suburbs? Are you concerned about nearby schools, shopping centres, or parks? Note that popular areas typically cost more.

• Size — How many bedrooms and bathrooms do you need? Are a home office, pantry size, and basement space important?

• Type of home — Are you looking for a freehold or condo? If you want a freehold, what type of home? Detached, semi-detached, bungalow, or townhome?

• Timeline — Are you planning to have kids in the future? If so, do you want to buy more space now to avoid moving later?

Many people will have an extensive wants list, but it may not align with what they can afford. Speak to your real estate agent as they can take a look at the market and advise you if your list is realistic. If it’s not, they’ll be able to recommend different homes or areas that fit most of your preferences.

Putting in an offer

When you’ve found a home you’re interested in, your real estate agent will show you any comparables and recommend a price you should offer. They’ll also suggest any conditions you may want to include in the offer. Conditions are important as they can provide you with some protection before you commit. Some common ones include:

• Financing

• Home inspection

• Condition of selling your own home

As mentioned, a pre-approval is not a guarantee, so securing financing through a condition is a way to make sure you’ll get the funds you need. A home inspection clause is common as you want to have a professional ensure there isn’t anything wrong with the home. Adding a condition about selling your own home is useful as it’ll ensure you’re not stuck with two homes simultaneously.

While adding conditions to an offer benefits the buyer, the reality is that they may also work against you. Homes for sale in hot real estate markets such as the greater Toronto and Vancouver areas attract multiple buyers, so sellers may not even look at any offers with conditions.

4. Closing the deal

Congratulations, your offer has been accepted. Take the time to celebrate, but understand that you’ll still have quite a few to-do items before you get those keys.

Confirm your financing

With your purchase contract in hand, you can go to your lender or mortgage broker to get your mortgage finalized. They’ll likely do their due diligence and send an appraiser to assess the value of the home you agreed to purchase. If everything looks good on their end, they’ll sign off on the mortgage, so you can lift any financing conditions.

Book a home inspector

Even if you didn’t include a home inspection condition, you might want to book a home inspector to check things out. They’ll provide you with a detailed report about the condition of the home so you can prioritize certain repairs, if needed.

"Homes for sale in hot real estate markets such as the greater Toronto and Vancouver areas attract multiple buyers, so sellers may not even look at any offers with conditions."

Hire a real estate lawyer

If you haven’t already, you’ll want to hire a real estate lawyer. Not only will they look over all the paperwork to help you finalize the deal, but they’ll also check to see if there are any liens or charges that need attention. Your lawyer will also be the liaison between your mortgage provider and the seller to ensure the right people get paid.

Understand your closing costs

While the purchase price is outlined in the sale agreement, there are additional closing costs that you need to factor in. As a general rule, you should set aside 3% of your purchase price for costs such as:

• Legal costs - This is the fee that your real estate lawyer charges.

• Land transfer tax - Some provinces charge the buyer a land transfer tax, but there are often rebates for first-time buyers.

• Title insurance - To protect you from any disputes related to your property’s title or ownership.

• Mortgage loan insurance - If your down payment is less than 20%, you’ll need mortgage loan insurance.

• Home insurance - Many lenders require home insurance from the day you take possession.

• Prepaid utility bills - Some owners prepay their utility bills and property taxes. If this was the case for the previous owner, you’ll need to repay them the difference.

Another consideration is the cost to furnish your home. You might already have some furniture, but the odds are you’ll likely want to purchase some additional items for your new home. You also need to consider the cost of painting and renovations if they’re part of your plan. These costs can obviously add up, so budget accordingly.

Get ready to move

A few days before you close, do a final walkthrough with your realtor to ensure the home is in the same condition as when you agreed to purchase it. If you’ve purchased a condo unit, coordinate with the building management to put your moving date on their radar and reserve the elevator. Additionally, review the details of your move with your movers; let them know what items are fragile and take inventory of your boxes. You may also want to create a checklist so you can keep track of how things are going.

Cue the applause, you’re officially a homeowner! Adjusting to a new budget and space will probably take weeks, if not months, but that’s part of the experience — just don’t forget to enjoy your new home.