Get off on the Right Foot When Buying Your New Home

January 06, 2021

Buying your new home in Canada can be an exciting journey but it is important that you know where to start. Across Canada, millennials are looking to invest in real estate as it turns out to be one of the best long-term investments they can make. Whether you are buying a house, an apartment, or a condo – the whole purchasing process can be intimidating. Read our guide to buy your home hassle-free in Canada.

1. Prepare Your Finances

Before you start your real estate shopping, it's important to do your research and calculate your finances. The first step is to save money and put it down as a down payment. Always remember, the larger your down payment amount, the easier it is to get a mortgage. Now the next question, how much I need to save for a down payment. This amount depends on the home purchase price. In Canada, it is generally observed – 5% to 20% of the home purchase price is made as a down payment. Apart from Down payment, put aside some money say 1.5% to 3% towards closing costs.

Closing costs may include the following:

  • Depending on your province and municipality, the amount of land transfer tax differs. It is calculated at a certain percentage of the cost of your home
  • Legal Charges: You need a lawyer to see if all your documents are in order. Approximately, expect to pay $1500 in legal fees and charges
  • Title Insurance: Usually title insurance is purchased through your lawyer and can cost up to $300. These are generally purchased in case of any ownership discrepancy.
  • Mortgage Default Insurance: If you purchase a house with less than 20% down payment, you need to have Mortgage Default Insurance also called as ‘CMHC Insurance’.
  • GST/HST: If you are buying, building a new home or condo, add GST/HST to the purchase price
  • Home Inspection (optional): Approximately this cost around $500/inspection, this reveals the hidden problems with the property before you purchase it. This is not mandatory, but highly advisable.

This is not a complete list, but this gives you a rough idea of what to expect in closing costs.

2. Organize your documents & Check Your Credit Score

A good Credit score increases the chances for you to get approved for a loan. You should monitor your payment history and always look at ways to build your credit score. Few tips to build your credit score:

  • Always make your payments on time
  • If you can’t pay the full amount you owe, make at least the minimum payment
  • Never skip a payment
  • Contact your lender, if you think you are having difficulties in paying the bill
  • Always use your credit wisely, try to use less than 35% of your available credit

Usually, any lender will look at three things before giving you a mortgage: Your Current assets, Income, and Current Debt. Apart from your credit history, also organize the following documentation:

  • Government-issued identification card
  • Employment proof and pay stubs, bank statement, tax returns, T4s, etc
  • Down payment documents (proof, source, acknowledgment letter if a family member is paying on your behalf)

Have all the above-mentioned documents ready and in order. This will help at the last moment.

3. Pre-approval

With your documentation and finances in order, it's time to move to the Pre-approval process. With a pre-approval in place, you know how much your monthly payments will cost and how much your lender can lend you. Visit a mortgage broker, they will look at your finances, and let you know how much money you qualify for and at what interest rate. With Pre-approval in place:

  • You know the maximum amount of mortgage you can qualify for
  • Guestimate your monthly mortgage payments
  • Depending on the lender, lock an interest rate for 60 to 120 days

Though Pre-approval is not mandatory, it is advised, as it helps in setting up a budget for your house. As a matter of fact, some real estate agents require your pre-approval before they start working with you. Pre-approval certifies you as a serious buyer, however, remember it does not guarantee your mortgage loan.

4. Get the best Mortgage Rate

Now it's time to shop around for the best mortgage rate. You can either visit the top banks in the county – the big 5 or simply to make life easy, visit a mortgage broker. A mortgage broker will compare all the prevailing market rates and give you the best rate available. Get professional advice – there are endless questions and clauses of mortgage options, fixed or variable? Monthly payments or bi-weekly rapid?

A mortgage broker will give you professional advice on which is the best product available to you. The Canadian Association of Accredited Mortgage Professionals recently reported that an individual who renewed or renegotiated through a mortgage broker saw their interest rate reduced by an average of 125 points, compared with 114 among those who dealt directly with a bank or credit union.

You can also consider getting pre-approved by a new lender to lock in at a certain rate. If you concerned, about the mortgage rate increases, take advantage of the lock-in rate. Most pre-approvals hold your rate up to 120 days. This is also a great option if you are in the market to purchase a home and haven’t found a home yet. With a lock-up rate, you don’t need to rush your new home buying as you are certain your rates are locked and won’t increase.

5. Take Advantage of First Time Home Buyer Options

There are a lot of incentives on offer for first-time homebuyers. These could help you save some money.

  • RRSP Home Buyer’s Plan: This allows a withdrawal of $25000 from their RRSP for first time home buyer to help in down payment. The RRSP must be at minimum 90 days old and this will require you to sign an agreement.
  • FTHB Tax Credit: First time home Buyer’s tax incentive offers $5000 amount, a non-refundable income tax credit amount for all homes acquired after January 27, 2009.
  • GST/HST Rebate: The amount paid towards GST/HST is reimbursed to eligible homeowners the purchase price or cost of building a new house,
  • Mortgage default Insurance: Known as “CMHC insurance,” this is a mandatory insurance policy for those who purchase a house with less than a 20% down payment.
  • Land Transfer Tax Rebate: Eligible first-time home buyers in British Columbia, Ontario, or Prince Edward Island receive a rebate on a portion of the land transfer tax that they paid. Also, first-time homebuyers in the City of Toronto are also eligible to receive a rebate on the city’s land transfer tax.

Before starting your real estate shopping, having all these documents in order and doing your research will help your entire journey to be smooth and fun.