How to Buy a House in Canada: A First-Time Buyer’s Guide

Buying a house is an exciting time—you are not only purchasing your home but making one of the biggest long-term investments of your life. 

Before you take the plunge, though, you need to cover all the bases, from deciding whether you are financially ready to become a homeowner to choosing the best mortgage lenders for your needs. 

Read more on how to buy a house in Canada, including all the steps you need to take and the pitfalls to avoid.

Step 1: Decide if you are ready to buy a house

Buying and owning a home is a big responsibility and you need to make sure that you are ready to handle it before you go house hunting. 

Here is a quick list of the aspects to consider. 

1. Finances 

The first thing to do is take a good look at your finances.

Do you have a steady income? How much of your monthly income can you spend on housing costs, including mortgage payments, property taxes and utilities? Can your budget cover unplanned events such as repairs and maintenance costs? What’s your credit score and is it high enough to get you a nice deal on your mortgage? 

According to Canada Mortgage and Housing Corporation (CMHC), you should allocate around 39% of your gross income to housing costs every month (including mortgage repayments, taxes and heating). If you are able to meet this threshold with your current finances, you are one step closer to becoming a homeowner. If not, it might be time to start saving. 

You might also want to consider supplementing your income with some freelancing work—a higher income will make it easier to manage housing expenses and make you a better candidate for a home loan. 

2. Time and effort 

In addition to finances, you should also consider whether you have the time and energy to be a homeowner. Remember: when you own a house, you are responsible for all maintenance and repair work, which can be time-consuming and exhausting. If you’re not up to the challenge, you might think about renting instead. 

3. Is it the right time to buy a house?

This is another important consideration. 

Even though average house prices in Canada have declined for the first time in two decades, they are still pretty high, outpacing income growth by almost 50%. 

At the same time, interest rates have increased, going up from 0.25% to 4.5% in March 2023 alone. So you might be paying less for the house, but more in interest over the life of the loan. 

What’s more, financial experts are predicting a recession for the better half of 2023—economic downturns are usually not the right time for big-ticket purchases as people prepare for hard times and focus on covering basic living costs, such as food, rent and transportation.

On the other hand, if you have enough saved up and can cover mortgage payments and other housing expenses, now might be the best time to invest in real estate and even purchase a home for less in more expensive areas such as Montreal and Toronto.

Step 2: Decide on the type of housing 

When shopping for homes, you generally have three options: you can buy new construction,  a home that is in pre-construction or a resold home. Each has its own pros and cons, but in general houses in pre-construction are cheaper since they are not move-in-ready. If you’re not in a rush to get out of your current home, this is a good option to look into. 

You also need to choose the right area or neighbourhood (if you have not done so far)—the best way to do this is to list your priorities, such as schools, transportation, low crime rates and proximity to amenities. Then check potential neighbourhoods and see which one ticks all your boxes.

Lastly, decide on the type of house you want. Are you looking for a semi-detached or detached home? Or are you interested in a condo or apartment? 

These decisions depend a lot on your requirements and the loan amount your lender approves you for, but getting a rough idea of the type of housing you want will help you set a budget from the start. 

Step 3: Save for a downpayment 

A downpayment is the amount of money you put towards the purchase of the home. 

In Canada, the minimum downpayment is between 5 and 20%, depending on the purchase price of the house. 

For instance, if the home is worth $500,000 or less, you need at least a 5% downpayment, however, if you are buying a home priced between $500k and a million dollars, you would need a minimum downpayment of 5% on the first $500,000 of the purchase price and 10% on the remaining portion. 

Those interested in buying homes in the Greater Toronto or Vancouver area where house prices are 1 million and higher, will need a 20% deposit or higher.

Keep in mind that your lender might ask for a bigger down payment if you are unemployed, between jobs, self-employed or have a bad credit history. For example, a borrower without any employment history in Canada will need a downpayment of at least 35%. 

It’s best to put up as much as possible for a downpayment. 

In addition to getting a lower mortgage, a bigger down payment can give you more equity in your home and the chance to qualify for a lower interest rate. 

You will also avoid the mortgage default insurance charge which is required for all borrowers who are unable to make a downpayment of at least 20% of the purchase price. Mortgage insurance typically ranges from 0.6% to 4.50% of your mortgage. 

What if I haven’t saved up for a downpayment yet?

Don’t panic. 

You can start saving any time (although the sooner you start the better). Here are some ways to grow your savings.

• TFSA and RRSP

You could put money aside each month into a tax-sheltered account, such as a TFSA or RRSP. These accounts will help you grow your savings and reduce the amount of taxes you pay—a win-win. 

• Invest

You can also open a savings account (preferably one with high interest) or invest in guaranteed investment certificates (GIC), low-risk mutual funds or ETFs.  Alternatively, you may get a loan to secure a down payment, although this is not always the best idea. 

• Consider debt consolidation 

While organizing your finances, look at opportunities for debt consolidation, particularly if you have several different types of debt, including credit cards and personal loans. Debt consolidation has its disadvantages, but if you are looking to cut down on liabilities and put more towards a down payment, it’s an option worth considering. 

• Take a look at government schemes and rebates 

There are several government-funded rebates and incentives that help you save on your first home. These are some of the most common ones 

• The Home Buyers’ Plan, allows you to withdraw up to $35,000 tax-free from your RRSP for the down payment of your first home (or $70,000 if you are buying with a partner). 
• The Home Buyers’ Amount is a non-refundable tax credit of up to $750
• The GST/HST new housing rebates offer a partial rebate on your tax bill
• The First-Time Home Buyer Incentive awards eligible homebuyers up to 10% of the purchase price
• The Tax-Free First Home Savings Account (FHSA) was proposed in 2022 and should be available to Canadians in spring 2023. This government incentive allows homebuyers to save $40,000 tax-free for the purchase of a house

There are several provincial and municipal schemes available as well, so check for government incentives in your area and see if you qualify.

Step 4: Determine how much you can afford 

It’s very important to figure out how big of a mortgage you can afford, and therefore, determine the price of your new home. There is no point in looking at a $700,000 worth-house when you can only get a $500,000 loan. 

There are a few ways to calculate how much house you can afford. The simplest is to use a mortgage calculator—this will give you a rough idea of how much you need to spend on loan repayments. 

Get pre-approved for a mortgage 

However, to get an accurate estimation of how much the loan will cost you, you need to get pre-approved for a mortgage. 

A mortgage pre-approval works just like a regular mortgage application—the lender will take a look at your income, debt, down payment and credit score to determine how much they are willing to lend you. They will also give you an estimated interest rate which you can use to calculate both your monthly mortgage payments and the overall cost of the loan. 

A mortgage pre-approval is not a guarantee that you will get those exact terms and rates when you apply for a formal loan, but it is a low-risk way to get a more accurate idea of the amount you can qualify for so you can start looking at homes that fit your budget. Plus, it’s free and does not commit you to a specific lender.

Note: Don’t forget to factor in other costs when calculating the price of the house, such as

• Closing costs: such as home inspection, legal fees, land transfer fees that typically come out to 1.5 to 4% of the purchase price;
• Property taxes

• Property insurance

• Moving costs

• Potential repairs or renovations

Shop around for the best mortgage rate 

As with any purchase, you need to compare rates from different types of providers in order to get the best deal. 

You could take a look at several mortgage providers, including online mortgage lenders, banks and credit unions yourself and compare rates. That said, engaging the services of a mortgage broker is much easier and faster—a mortgage broker will have you fill out an application, then use it to find you the lowest rate possible. They will also help you decide on the type of mortgage you need (whether you’re going for an open or closed mortgage, fixed or variable rate, the type of mortgage charge involved and other important decisions)

The services of a mortgage broker range from 0.5% and 1.2% of the total mortgage amount, but it is money well spent since getting a lower interest rate can shave off tens of thousands in interest over the life of the loan.

Step 5: Start house hunting 

With your finances sorted, it’s time to start looking at houses. 

While you can check out listings posted online (there are several websites that specialize in finding the right home for you), finding a qualified real estate agent is a much better option. 

Why?

Realtors will not only guide you through the entire process but can also help you find properties that aren’t publicly available online and flag some issues with the different homes you see. 

Working with a real estate agent also minimizes the risk of scams and gives you insight into local trends and market values. Plus, realtors earn a commission from the sale, which means they’ll work hard to get the best deal possible for you.

Don’t forget to 

• Make a list of all your requirements, including wants and needs, before you start looking at houses. This way you will know what features and upgrades you can be flexible on and which are a must-have, thereby narrowing down your search. 
• Also, ask questions when viewing houses—enquire about ventilation, heating costs, storage space, water damage, plumbing, issues with neighbours—anything you can think of. 

A house is a huge purchase, so don’t settle for anything less than your dream home.  Your finances are in order and you are prequalified for a mortgage so take your time and look at several properties before you make a final offer.  

Step 6: Make an offer

Once you find a home that you like and everything checks out, you can make an offer. First offers are rarely final—the seller might counter or the offer might be subject to a home inspection. If the market is hot, you may need to compete with other buyers as well. This gives you room for negotiation, not just on the purchase price, but on potential repairs and inclusions. 

If all goes well, your offer will be accepted and you can make your down payment and pay the closing costs. Your lawyer will finalize the financing, check if your homeowner’s insurance policy is in place on closing day, have you sign all the paperwork and ultimately transfer the title of the house to your name. The process can take one to two months, depending on the terms of the purchase. 

After the formalities are completed, you will get your keys from the real estate agent and move into your new home. 

Bottom Line

Buying a home is not a simple process and there are a lot of intricacies involved, depending on the type and location of the property you are interested in, the state of the market, how motivated the owner is to sell and dozens of other aspects. 

So, take your time and get your finances and documents in order before you apply for a mortgage or look at homes. Make sure you save as much as you can towards a down payment and explore all your options, from tax-sheltered saving accounts to government grants. Should you have any doubts, don’t hesitate to consult a professional such as your mortgage broker or real estate agent —they are here to make the process less stressful for you.