First Time Home Owners Guide 2021

Congratulations, becoming a homeowner, whether you want to buy a house, a condo, or a townhouse, is possibly one of the most significant decisions you will ever make, and I fully understand that even though you are feeling excited, you are probably also feeling a tad scared too. So I hope this guide will help you throughout the whole process from start to completion!

Purchasing a property

There are a few costs when you are purchasing a property other than the purchase price, such as: Closing costs, for example, A home inspection, legal fees, and land transfer taxes.

  • Property taxes and property insurance
  • Mortgage insurance (if needed)
  • Heating, hydro, water, and other services
  • Home maintenance and repairs

First Steps

Assuming you have found the property you want to purchase, your first step would be to choose your mortgage. Generally, most homeowners need a mortgage to buy a property unless you are fortunate and already have the available funds!

A mortgage is a loan secured from a lender (bank or broker) secured against the property (the property acts as collateral). You would be expected to make a down payment on the property to qualify for the mortgage. Then once the mortgage is secured, you will need to make monthly payments toward the interest and principal (property price) of your mortgage.

As you make payments on the mortgage, a greater proportion of your monthly payment will go toward the principal and less toward interest. Some lenders will also allow you to make additional payments that go toward your principle if you want to pay a lump sum, for example.

The down payment (if required)

Owning your own home can be costly. Most first time homeowners in Canada aren’t able to buy their home outright, mainly because houses are expensive. Generally, buyers make a down payment using money they have saved. This is usually around 5% of the property purchase price. The rest of the money is borrowed through a mortgage from a lender such as the Bank of Canada.

If you can, though, consider making as large a down payment as you can, this will bring down your mortgage payments and help you avoid paying additional costs like mortgage insurance.

If your down payment is equal to or more than 20% of your home’s purchase price, you could meet the requirements necessary for a ‘conventional’ mortgage, which means you don’t need to purchase mortgage insurance.

If you don’t have 20% to put down, you could still get a mortgage, but you will have to take insurance against defaulting on your mortgage.

If this is your first home and you don’t have an employment history in Canada, you may still be able to get a mortgage but will probably need a down payment of 35% or more.

Mortgage options

Talking to a mortgage specialist will help you with this step. The specialist will help you decide which mortgage suits your needs and finances. But typically, there are three things a lender will look at before giving you a mortgage, like your current assets: what you own, your income, and your current level of debt.

Your mortgage lender may also want to see:

  • Official ID like a driver’s license or passport.
  • Proof about how you intend to pay your down payment, for example, savings account, RRSP, the sale of another property, gift, and so on. They will also want to know if a family member contributes towards your down payment and will need to see a signed letter from them acknowledging the gift’s purpose and confirming that it is non-repayable.
  • Proof of employment and income such as pay stubs, T4s, income tax returns, bank statements, and so on
  • Information about any other assets you have
  • Information about your debts, e.g., credit card balances, car loans or leases, lines of credit, student loans, or financial obligations, e.g., spousal/child support.

Mortgage term

A mortgage term refers to certain factors of your mortgage over some time, for example, your interest rate and payment frequency. The most common mortgage term in Canada is five years. But you can also obtain mortgages from one year to ten-year terms. The interest rates you will be expected to pay will vary depending on the mortgage terms you agree on. For example, the interest rates you would pay will be higher on a ten-year term than those on a one-year term.

Mortgage amortization

This is the total length of time you’re given to pay off your mortgage, which is generally 25 years.

Fixed versus variable

Choosing a variable or fixed-rate mortgage is very important.

A fixed-rate mortgage has an interest rate that stays unchanged during the period of your mortgage term.

A variable-rate will fluctuate depending on market forces.

A fixed-rate mortgage can give you peace of mind but will often have a higher interest rate.

A variable-rate mortgage typically has a lower interest rate because banks have the power to raise or lower your mortgage rate depending on the interest rate the Bank of Canada sets, passing on higher rates to consumers and vice-a-versa.

Right now, interest rates are at an all-time low, so now would be a great time to consider purchasing your first home!

Frequently asked questions by first-time homeowners

What is a mortgage?

A mortgage is a loan secured from a lender (bank or broker) secured against the property (the property acts as collateral).

What is a down payment?

Buyers make a down payment on a home using money they’ve saved. It is normally around 5% of the purchase price.

What if I have no employment history?

You may still be able to get a mortgage but will probably need a down payment of 35% or more.

How large should your mortgage be?

Your mortgage should only be as large as you can afford.

What is a prepayment charge?

You may have to pay this financial penalty if you want to pay off your mortgage early if your mortgage term does not allow you to do so. Penalties vary but can be steep.

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Sarah Clark

A native of St. Catharines, Sarah went to the University of Western Ontario where she earned a B.A. in Political Science and History. She loves to read books and is very involved in her community, with vast experience in the non-profit, education and health care sectors. Sarah is an experienced writer on business and technology, as well as media relations, social media and communication.