First-Time Home Buyer Guide

Canada’s white-hot real estate market can make being a first-time home buyer a dizzying and exhausting experience. But don’t let the challenges of becoming a homeowner discourage you.

Despite the sky-high home values and low number of properties for sale across the country, 39% of Canadian adults plan to purchase a home in the next five years, according to a new NerdWallet survey conducted online by The Harris Poll among 1,018 Canadians. Meanwhile 18% of Canadians have an even more ambitious goal: purchasing in the next two years.

Before you take your first shot at the market, you’ll want to be prepared for both the highs and lows you may encounter. Here are some tips and considerations to help you successfully navigate your first home buying adventure.

Are you ready to be a first-time home buyer?

There are many reasons to want to be a homeowner. Among Canadians who plan to purchase a home in the next two years, NerdWallet’s survey found the most common reasons to be:

• A desire for more space (32%).
• A belief that a home is a good investment (24%).
• Moving to a more affordable area (22%).
• A desire to be closer to family/friends (20%).
• A belief that buying is more affordable than renting (19%).
• A desire for a better location, like a community with warmer weather or proximity to water (18%).

These are all solid, traditional reasons for wanting to buy a home. But wanting to buy and being ready to buy aren’t the same thing. It’s important to honestly assess whether you’re prepared to buy — and commit to maintaining — a home of your own.

When deciding if home ownership is for you, consider your financial stability, your capacity to juggle all the new responsibilities that a home entails, what you’re willing to sacrifice to own a home (vacations, eating out, etc.) and how good you are at managing debt.

What can you afford?

While many of us would love a home with lots of space and amenities, it’s important to be realistic and keep your home aspirations in line with your income. Twenty-four percent of Canadians who currently want to purchase a home said a lack of available properties within their budget was preventing them from reaching their goal of buying a home now.

» FIND OUT: How much mortgage can I afford?

According to the Canada Mortgage and Housing Corporation (CMHC), your monthly housing costs should not exceed more than 32% of your average before-tax monthly income. This is called your gross debt service (GDS) ratio.

You can figure out what your GDS ratio is by using this calculation: Total housing costs / Gross family income x 100

Housing costs include things like mortgage payments, heating, 50% of condo fees (if applicable), and property taxes.

Furthermore, the CMHC advises that a person’s entire monthly debt load should not exceed more than 40% of their gross monthly income. This percentage is known as your total debt service (TDS) ratio.

Figure out your TDS ratio with this calculation: (Total housing costs + other debt payments) / Gross family income x 100

In other words, your debt load includes your mortgage, property taxes, heat, 50% of any condo fees, as well as all your other debt payments, including for credit card debt or other loans.

Canadian mortgage lenders calculate and use your GDS and TDS ratios to decide if you qualify for a mortgage and what amount they will loan you. Note that there is a bit of wiggle room with what percentage lenders will accept, and you can still qualify for a mortgage even though your GDS and TDS ratios are higher than those set by the CHMC.

Keep in mind that when making an offer on your first house, it’s not just the mortgage costs and down payment that you need to consider. You’ll also have to factor in the expenses of managing a home, such as basic maintenance, utilities, property taxes and more. When it comes to home maintenance, experts say you should expect to spend anywhere from 2% to 5% of the value of your home on maintenance each year.

Down payment

To buy a house in Canada, you’re required to have a minimum down payment of at least 5% of the purchase price for homes of $500,000 or less. For homes that cost more than $500,000, you will need a minimum down payment of 5% for the first $500,000 and at least 10% for the remaining portion of the purchase price. Homes that cost $1 million or more require a down payment of at least 20%, as do investment properties you don’t intend to live in.

As home prices keep rising, those minimum down payments do, too. That’s become a major roadblock for a significant number of Canadian home buyers. Of those who want to buy now, 23%  are unable to because they don’t have enough money saved for a down payment, according to NerdWallet’s survey.

Housing availability in Canada

One of the most severe challenges facing first-time homebuyers is wading into the market when housing supply has largely dried up.

Seventeen percent of Canadians who want to purchase a home now say a lack of available houses homes for sale in their desired area is hampering their home hunt, according to NerdWallet’s survey.

Housing supply varies every day. There’s no guarantee that the type of home you’d like to buy will be available when you’re ready to buy, or that several other buyers won’t challenge you for it in a hotly contested, winner-take-all bidding war.

But on the other hand, you might start looking for a home at a time when a large number of sellers decide to list their properties, or when a significant number of newly built homes are set to hit the market. Consider reaching out to a real estate agent who specializes in the area, or areas, where you’d like to buy. They’ll be able to tell you how competitive the local market is — and how much higher than the asking price you may have to pay.

Tips for getting your first mortgage

Start saving your down payment early

Even if you’re not planning to buy a home for several years, there are benefits to getting a jump on your down payment savings.

Unless you have enough cash to buy a house outright, you’re going to need to secure a mortgage. In Canada, if you don’t have a down payment of at least 20% of a home’s value you’ll also have to get mortgage loan insurance through a provider such as CMHC.

The insurance protects financial institutions if home buyers default on their mortgage. Premiums are factored into your mortgage payments, so the smaller your down payment, the greater the premiums — and hence the higher your mortgage payments overall.

Starting to save for a down payment even before you have firm plans to buy your first home could mean avoiding mortgage insurance and enjoying a smaller monthly payment — not to mention more home equity.

» MORE: How does mortgage interest work?

Know your credit score

Your credit score is a reliable indicator of your overall financial health. Potential mortgage lenders will look at your credit score when deciding whether to give you a mortgage and at what interest rates.

Knowing your score will help you decide if you should wait to buy a home and instead do what you can to build your score first. Note that for mortgage insurance the CHMC requires that the minimum credit score of at least one of the borrowers is 680.

Ensure you can pass the stress test

To qualify for a mortgage in Canada, home buyers must pass the mortgage stress test. The test was introduced in 2018 to ensure that buyers could afford to maintain their mortgage payments if interest payments were to rise.

All potential borrowers, no matter what down payment they are making, must show they can afford mortgage payments based on their contracted mortgage interest rate plus 2%, or 5.25%, whichever is higher.

So, for example, if the bank is offering you a rate of 2%, you would still have to prove you could afford to make monthly mortgage payments if interest rates rose to 5.25%.

Research different types of mortgages

Do you want a fixed (locked in) or variable (changeable) rate of interest? Do you prefer a closed (can’t pay a mortgage back early without penalty) or an open mortgage (can be paid off at any time)? How long of a mortgage term do you feel comfortable with?

Compare lenders and get pre-approved

It’s important to take the time to compare qualification requirements, loan options, interest rates and fees across multiple types of lenders before choosing a mortgage. You might consider the options offered by a traditional bank, a credit union and an online-only bank, for instance. Comparing lenders will help you understand your options and ensure you get a mortgage that meets your needs at a competitive price.

Getting pre-approved for a mortgage is helpful because it gives you a realistic idea of what you can afford to spend on a home. You can apply for pre-approval with several lenders to compare their offers; getting pre-approved does not hold you to a specific lender.

Explore assistance programs

The Canadian government offers a variety of national programs to help those who are buying their first home, including the following:

• First-Time Home Buyer Incentive. This program lets qualifying buyers borrow money (5% or 10% of a home’s purchase price) from the federal government to put toward a down payment.
• Home Buyers’ Plan. First-time homebuyers can withdraw up to $35,000, tax-free, from their registered retirement savings plan (RRSP) to put towards a home purchase. The funds must be paid back within 15 years.
• Home Buyers’ tax credit, also known as the Home Buyer’s amount. A non-refundable credit of up to $10,000 for first-time home buyers. It results in a $1,500 tax rebate.

Methodology

This survey was conducted online by The Harris Poll on behalf of NerdWallet from March 22-25, 2022 among 1,018 Canadian adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval.  For this study, the sample data is accurate to within + 2.8 percentage points using a 95% confidence level. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Marcelo Vilela at [email protected]

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