The complete guide for first-time home buyers in Canada
You’re 2 minutes away from getting the best mortgage rates in Canada. Just answer a few quick questions to get a personalized rate quote.
You will be leaving MoneySense. Just close the tab to return.
Buying your first home is an exciting experience, but it can also be an overwhelming one—especially if you’re not sure where to start. That’s why we’ve outlined some simple steps that anyone shopping for a home should take, from figuring out what you can actually afford to getting pre-approved for a mortgage and understanding the government programs designed to help you. If you have questions, we have the answers in our complete guide for first-time home buyers.
The cost of buying a home in Canada
First-time home buyer programs and rebates
- The first home savings account
- The Home Buyers’ Plan
- The First-Time Home Buyer Incentive
- The Home Buyers’ Tax Credit
- Land transfer tax rebates
How mortgages work in Canada
- What is a mortgage?
- How fixed and variable mortgage rates work
- Best mortgage rates in Canada
- Lender vs. mortgage broker
- How much can I afford on a mortgage?
- Using mortgage calculators to weigh your options
- Why you should get pre-approved
- How much can you actually afford?
- What is the mortgage stress test?
Tips for first-time home buyers
The cost of buying a home in Canada
Many first-time buyers will have to borrow money when buying a home. There are also fees involved in the purchase process. These costs can be significant—so they are important to consider. For every known expenditure, there are often hidden or unexpected fees. We break it all down for you below.
The down payment
A down payment is the lump sum of money you will have to put towards the total cost of your new house. Your down payment has to be liquid funds you have access to, such as a money in a savings account, a gift from a family member or a withdrawal for your first home savings account (FHSA) or registered retirement savings plan (RRSP). The amount you’ll need for the down payment depends on the purchase price of the home, according to the rules set by the government of Canada.
|Minimum down payment required
|$500,000 or less
|5% of the purchase price
|$500,000 to $999,999
|5% of the first $500,000 of the purchase price
10% of the portion of the purchase price above $500,000
|$1 million or more
|20% of the purchase price
First-time home buyers tend to have a smaller down payment than those who’ve previously owned real estate, because they aren’t carrying over equity from a previous property, explains mortgage broker Sharon Patton, who serves the Greater Toronto Area (GTA). If you own a home and its value increases over time, you can take that equity and use it towards a larger down payment on your next house. Buyers with less than a 20% down payment must include the added cost of mortgage loan insurance—a.k.a. mortgage default insurance—to their budget.
- Home buyers: How large should your down payment be?
- How to invest down payment funds while timing the real estate market
- How much you need to earn to afford a home in Toronto and the GTA
- How much you need to earn to afford a home in Vancouver and the GVA
A deposit is paid at the time of signing a purchase agreement on a property. The deposit counts toward your down payment but is often non-refundable, so if you back out of the deal before it closes, you will likely lose that money.
In Canada, there is no standard deposit amount. A guideline of 5% of the purchase price is often used (equal to $50,000 on a $1 million home). But the rapid increase in housing prices have caused some sellers to accept less than 5%. (When multiple offers are made on the same property, the seller may ask for more). Typically, there’s room to negotiate, but a deposit of 5% helps show the seller you’re serious and could help you secure the deal in competitive housing markets. Keep in mind that the funds should be easily accessible as the money is typically due within 24 hours of signing a real estate contract.
Then, there are closing costs. “I start every client conversation with closing costs because it often comes out of the down payment that is available,” Patton says.
These costs—which include lawyer fees, land transfer taxes and other administrative fees—vary somewhat based on the property price and location, but they typically add up to 1.5% to 4% of the purchase price. If you have saved $50,000 for a down payment, you either have to have additional savings to cover closing costs or deduct those expenses from the down payment itself.
You should also set aside money for the cost of home inspections, utility hook-ups, prepaid fees on the property you’re buying (for example, reimbursing the previous owner for property taxes or condo fees they paid in advance), plus any furniture and appliances you’ll want to purchase right away.
When you add it all up, if you expect to have a down payment of 5%, in reality, you’ll need a minimum of 6.5% of the purchase price to cover these upfront costs, notes Patton. Then, you still need to factor in extra funds for emergencies, such as fixing a leaky roof or basement, or having to replace your furnace or A/C. For a property priced in the $600,000 range, she recommends emergency savings of $5,000 to $10,000.
First-time home buyer programs and tax rebates
There are several government programs and tax rebates designed to help first-time buyers get into the housing market.
The first home savings account
The first home savings account (FHSA) is a new kind of registered account is intended to help first-time home buyers save for a down payment. Account deposits and withdrawals are tax-free, and like a tax-free savings account (TFSA) or RRSP, any income earned from interest, dividends or capital agains is tax-free. Individuals can contribute a maximum of $8,000 per year to their FHSA, up to a lifetime maximum of $40,000. Funds can be held in an FHSA for up to 15 years, at which point the money must be used to buy a home, transferred to an RRSP or a registered retirement income fund (RRIF), or withdrawn as taxable income.
The Home Buyers’ Plan
As a federal government program, the Home Buyer’s Plan allows you to withdraw up to $35,000 from your RRSPs ($70,000 per couple) to make a down payment on your first home. This money can be withdrawn and used without penalty or taxation as long as it’s repaid to your RRSP within 15 years.
The First-Time Home Buyer Incentive
Through the First-Time Home Buyer Incentive, eligible first-time buyers can receive an interest-free loan of 5% or 10% of the purchase price of their home, to be applied towards their down payment. The government retains a stake in the property, which must be repaid after 25 years or when the home is sold—at the fair market value at the time of sale. While there are benefits to the program, Patton, the mortgage broker, cautions that it can limit the maximum purchase price available to first-time buyers. That’s one of the reasons the federal government announced, as part of its 2022 budget, that it will extend the program until March 31, 2025. The government has also said it is “exploring options to make the program more flexible and responsive to the needs of first-time home buyers, including single-led households.”
The Home Buyers’ Tax Credit
In 2022, the federal government doubled the amount of the Home Buyers’ Tax Credit. Now, new home owners can claim up to $10,000 on their taxes (for a rebate of up to $1,500) for homes purchased on or after Jan. 1, 2022.
Land transfer tax rebate
The provinces of Ontario, British Columbia and Prince Edward Island offer land transfer tax rebates to eligible buyers, as does the City of Toronto (the only municipality in Ontario to levy a land transfer tax of its own). Eligibility requirements vary per jurisdiction, as does the amount you may be eligible to receive.
Watch: What is the First-Time Home Buyer Incentive
How mortgages work in Canada
What is a mortgage?
In its simplest form, a mortgage is a loan used to buy a home or property. Like other loans, a mortgage comes with an interest rate, amortization (repayment) schedule and other terms. With a mortgage, the home itself is used to secure the loan. This means if the mortgage holder fails to make payments, the home could be repossessed by the lender.
Before applying for a mortgage, familiarize yourself with the following concepts. That will help ensure you get the mortgage that’s right for you:
- Term: The amount of time your mortgage contract is in effect. Terms can range from six months to five years or more.
- Amortization: The total length of time that it will take to pay off your mortgage. Major lenders in Canada typically offer amortization periods of five to 25 years, with the maximum being 30 years when you have a down payment of at least 20%. Buyers typically complete several mortgage terms before paying off the loan entirely.
- Interest rate: The amount of interest you will pay on the mortgage. The interest paid is incorporated into your regular mortgage payment; the other portion of your payment pays down the principal amount borrowed.
- Open or closed mortgages: Refers to the level of flexibility in your mortgage repayment terms. If you want to be able to renegotiate, refinance or even repay outside the original terms, you’ll want an open mortgage. A closed mortgage won’t allow for flexibility. However, it will typically have a lower interest rate.
- Fixed and variable rates: With a fixed rate, the mortgage interest stays the same throughout the entire term. With a variable rate, the interest rate can fluctuate as market conditions change.
- What’s the best mortgage for first-time home buyers?
- Should you get a 30-year mortgage in Canada?
- How to read your mortgage documents
Fixed vs. variable mortgage rates
When applying for a mortgage, Canadian home buyers can choose between a fixed or variable interest rate. The type of interest rate will influence the total amount of interest paid over the mortgage repayment period. It will also determine whether your interest rate stays the same (“fixed”) or has the potential to change during your mortgage term. To help you understand the differences, we can compare five-year fixed and five-year variable mortgage rates.
- Five-year fixed mortgage rates: The interest rate is locked in for five years, which means you can predict what your mortgage payments will be for the duration of your contract. Though more predictable, fixed rates are typically higher than variable rates.
- Five-year variable mortgage rates: As the name implies, these mortgages also come with five-year terms. However, unlike fixed-rate mortgages, the interest rate charged can change during the contract. Depending on the terms of your mortgage, your regular payment may change or it may stay the same when rates go up or down.
Best mortgage rates available today
Here are some of the best fixed and variable mortgage rates available in Canada right now. To compare rate types and terms, click on the filters icon beside the down payment percentage.
Lender vs. mortgage broker
Some first-time home buyers choose to go directly to their bank for a mortgage because they’re familiar with the financial institution and already do business there. There’s nothing wrong with this approach—some individuals or couples like to keep all of their financial relationships under one roof, so to speak. But you definitely have more options if you compare rates online and/or work with a broker can save you money. A mortgage broker is a professional who will tap into a network of lenders and help you find the best mortgage to meet your needs.
“Going to your bank means your only option is one lender, but going to a broker allows you to access multiple lenders,” including multiple banks and credit unions, Patton says. She adds that some financial institutions serve a niche demographic, like new Canadians or self-employed individuals, and a broker may be able to help you find the one that’s right for you.
- What is a mortgage broker?
- How do mortgage brokers get paid?
- 5 things your mortgage broker isn’t telling you
- Do I need to pay mortgage broker fees?
How much can I afford on a mortgage?
Once you have a sizeable down payment in hand, the next step is figuring out how much you can afford on a mortgage—the amount you will pay back, with interest, to the lender. The mortgage is calculated as the total cost of your home, minus the down payment.
When you apply for a mortgage, your lender will look at your gross debt service (GDS) ratio and total debt service (TDS) ratio in order to determine how much mortgage a person with your debt and income level can reasonably carry.
Watch: What is mortgage affordability?
These numbers are essentially a test of your income in relation to your debt and anticipated housing expenses, and they will influence the mortgage amount you’re offered. TDS is equal to the expenses of your new home (i.e., your mortgage payments, heating bills, taxes, and any applicable condo fees), divided by your gross household income. GDS is the combination of these same housing expenses, plus your existing debt payments (such as car loans and revolving lines of credit), divided by your gross household income.
The Canada Mortgage and Housing Corporation (CMHC), Canada’s national housing agency, considers a home to be affordable if your GDS and TDS fall within the limits of 39% and 44%, respectively. The Financial Consumer Agency of Canada says your GDS and TDS cannot exceed 32% and 40%, respectively.
- How much mortgage can I afford?
- A line of credit is derailing my mortgage application
- Advice on making your first home more affordable in Toronto
- How does credit card debt affect a mortgage application?
Using mortgage calculators to weigh your options
Comparing mortgage options can be difficult, especially for first-time buyers. That’s where mortgage calculators come in handy. These online tools allow you to visualize the impact a mortgage will have on your finances. Can you really afford a mortgage right now? How would extending your amortization or getting a better interest rate influence your mortgage payments? Using the right mortgage calculator can help answer these questions.
Explore our mortgage calculators for first-time home buyers:
- Mortgage affordability calculator
- Mortgage payment calculator
- Land transfer tax calculator
- Mortgage insurance calculator
- 10 must-use online housing and mortgage calculators
Why you should get pre-approved
Once you know how much you can afford, you’ll then want to get pre-approved.
“Pre-approval just means you have everything in place for approval,” Patton says. “It’s basically getting your paperwork in order—your credit report, verifying your income, making sure the price you’re looking at is affordable based on your debt-to-income ratio.” She also notes that you will require a 90-day history on the funds used for your down payment, which helps protect against money laundering (when criminals conceal money through real estate transactions).
The purpose of a mortgage pre-approval is essentially to make sure you’re shopping within your housing budget, Patton says. If you look at houses worth $900,000 and later realize the most you can afford is $750,000, you’ll be disappointed and have wasted your time, she says. “A mortgage pre-approval just means getting everything in place to make sure you’re looking at the correct properties.” It’s also a way of showing the seller you’re a serious buyer and have your financials in order; in a competitive housing market, that alone can determine whether your offer is accepted or rejected.
Now, how much can you actually afford?
A mortgage pre-approval will tell you what the banks and other lenders are willing to offer, but that’s different from understanding what you can actually afford.
While important, the TDS and GDS ratio guidelines are based on averages, not individuals or families. It’s best to create a detailed monthly budget to assess what you can actually afford without feeling house poor (meaning, your mortgage payments are so high that you have little money left over for other things). This should include everything from your grocery and cell phone bill to entertainment and transportation costs.
Two households with the same income may have wildly different housing budgets due to lifestyle differences—but your lender won’t know that when offering you a mortgage. “We don’t know things like your daycare costs, for example,” Patton says. So if you love to travel or spend a lot on gas for your commute, factor in those expenses before committing to a mortgage.
What is the mortgage stress test?
You may have heard of the mortgage stress test. It’s a set of rules lenders use to determine if buyers qualify for a mortgage and, if so, for how much. It applies even for buyers with a down payment of 20%.
“They brought in the stress test to ensure that Canadians could still afford their homes if mortgage rates went up,” Patton explains. She notes that while we’ve seen all-time low mortgage rates in recent years, they are expected to increase in the coming years. “It’s protecting you against potential future rate increases.”
Watch: MoneySense – What is the mortgage stress test?
Changes were made to the mortgage stress test in 2021. Under the new rules, lenders apply a benchmark rate of 5.25% or the rate equivalent to 2% more than the rate you’re being offered—whichever is higher.
The stress test is included in your mortgage application and applies to everyone purchasing property in Canada, not just first-time home buyers.
- What home buyers should know about the Canadian mortgage stress test
- Why the mortgage stress test isn’t the villain it was made out to be
Tips for first-time home buyers in Canada
Strategies for first-time home buyers
With today’s high real estate prices, first-time home buyers need a solid financial plan—and often a little bit of creativity—to get into the market. Whether you’re looking to buy in one of the country’s hottest real estate markets or simply want tips on how to avoid common mistakes when shopping for a home, you’ll want to have a look at these stories:
- 6 smart strategies for first-time home buyers
- 9 mistakes first-time home buyers make
- How to make it as a first-time home buyer in Toronto
- How to benefit from being a first-time home buyer in B.C.
- What it’s like to be a first-time home buyer in Ontario—for real
Best places to buy a home in Canada
Not sure where to start your search for the perfect home? The Canadian housing market has rapidly evolved since the start of the COVID-19 pandemic—with real estate prices reaching new highs and many people relocating to traditionally less populated rural areas. So we’ve put together a guide on where to buy real estate in Canada. Inside, you’ll find a rank of the best-value neighbourhoods across the country based on average home prices, price growth in recent years, and neighbourhood characteristics and economics.
- Why are homes selling for so much higher than the list price?
- Home economics: How moving to a smaller city can reap big financial gain
- Should I stay or should I go: The real costs of moving out of the city
Should you buy a home in Canada?
Home ownership has many benefits: You aren’t at the mercy of a landlord who gets to make all of the decisions (including choosing to no longer rent out the property), and you may have the potential to use your home to create rental income yourself. Houses are also a fairly secure investment in Canada as they typically appreciate in value over time.
While it’s a common goal, home ownership isn’t right for everyone, says Josh Davie, a financial advisor with Desjardins Financial Security Investments Inc. “It depends on your personal situation,” he says. If your job is uncertain and/or you expect to relocate in the near future, for example, renting may be a better financial option, as it provides more flexibility.
Renting may also be a good choice for those who don’t want to deal with the responsibilities of home ownership, such as handling repairs and paying property taxes. “If you feel you aren’t financially stable enough or don’t have the financial management skills to handle homeownership, you shouldn’t feel forced to buy into real estate,” Davie advises.
Patton agrees. “People who want more hands-off living are often more suited to renting because the landlord will maintain the property,” she says. Renting is ideal if you don’t want to pay for incidentals, such as property taxes, utilities, home maintenance and unexpected repairs.