Clay Jarvis
Kurt Woock
Beth Buczynski
Canada’s real estate market is tough for first-time home buyers. A lack of supply, strict mortgage guidelines and elevated prices all create obstacles to becoming a homeowner.
Getting a grasp on the home-buying process can help you shop for homes more confidently. Creating a realistic budget, understanding your local housing market, and contacting the right professionals are just a few ways to get started.
3 steps to a complete home-buying budget
1. Find out how much house can you afford
You can’t make an offer on a home until you know how much financing you’ll be approved for. Skipping this step could lead to painful legal and financial headaches.
Here are two ways to determine your home buying budget:
- Use a mortgage calculator. A mortgage affordability calculator estimates the maximum home price you can afford based on your income and debts. A mortgage payment calculator breaks down a home purchase into monthly payments. Both can be useful, but neither one is an official document you can base an offer on.
- Get pre-approved for a mortgage. A mortgage pre-approval from a lender or mortgage broker tells you how much money you will be able to borrow for a future home purchase. This is an indispensable step in the home buying process.
A mortgage pre-approval is about more than establishing a budget. It’s also when you’ll make other decisions regarding your mortgage. Depending on the state of your finances, you may be asked to choose between:
- A fixed or variable rate of interest.
- An open or closed mortgage.
- Different mortgage term lengths.
Your choices will often be determined by cost, qualification requirements or convenience. Your mortgage advisor can explain how each option will affect your mortgage, but the ultimate decision is yours.
Broker or bank for your pre-approval?
Typically, a pre-approval with a mortgage broker will provide more options than one with a Big Six bank’s mortgage advisor.
A mortgage broker works with multiple lenders, some of which might have less stringent lending criteria. A bank, on the other hand, has one strict set of lending standards to hold you to.
You’ll need to pass a mortgage stress test
To qualify for a mortgage in Canada, all home buyers must pass the mortgage stress test.
You must show that you can afford mortgage payments based on an interest rate of 2% over the rate you’re offered, or 5.25%, whichever is higher.
If the bank is offering you a rate of 4%, for example, you would need to prove that you can still afford to make monthly mortgage payments if interest rates rose to 6%.
You may need to take a step back from the market
During the pre-approval phase, you might find out that you aren’t able to qualify for the mortgage you need. In these cases, a lender could ask you to pay off some of your debt or increase your down payment. Both steps might require you to hit pause on your home buying plans so you can strengthen your finances.
2. Estimate upfront costs
Down payment funds
The cash you pay upfront for a home is called a down payment. This is money you may have saved or received as a gift from a family member. Many provinces and local governments also offer down payment assistance programs for those who qualify (income often determines eligibility).
You’ll have to adhere to Canada’s minimum down payment guidelines to be approved for a mortgage. Put down less than 20% and you’ll be required to purchase mortgage default insurance, which will be added to your mortgage principal.
Closing costs
Closing costs pay for things like land transfer taxes, appraisals and legal fess. The exact amount can vary, but be prepared to pay 3-5% of the home’s market value.
Use a closing costs calculator to estimate what you might pay in a particular province.
Nerdy Tip. When saving for a down payment, a First Home Savings Account, Tax-Free Savings Account or the Home Buyers’ Plan may be better options than a regular savings account. These tools all have their own rules and benefits, so compare them before you start using one.
3. Plan for additional ongoing costs
To get a more accurate sense of how much homeownership might cost you, it’s important to factor in expenses beyond your mortgage. If you move to a suburban location and have to commute to work, for example, you should calculate what your commuting costs might add up to each month.
Other expenses you’ll want to account for include:
- Lifestyle spending like shopping, socializing and subscriptions.
- Utility bills that aren’t factored into your mortgage pre-approval.
- Parking.
- Seasonal maintenance costs.
Nerdy Tip: When estimating your homeownership budget, it might be helpful to get the help of a mortgage professional or real estate agent. If you’re crunching your own numbers, be as accurate as possible. Erring on the high side when tallying these costs can help account for rising prices in the future.
First-time home buyer mortgages
There are programs and products designed especially for first-time home buyers, but everyone plays by the same rules when it’s time to get a mortgage. Tap the tabs below to get answers to common questions first-timers have about the mortgage process.
Lenders use many variables, including your credit score and income, when determining which rates to offer you. Increasing your annual income and improving your credit score can have a big impact on your rate.
Comparing mortgage rates from different lenders and mortgage brokers is another way to get a better rate. Just as you’d probably go to multiple dealerships if you were car shopping, you stand to benefit from speaking to multiple mortgage lenders.
And just because it’s your first time getting a mortgage doesn’t mean you shouldn’t negotiate your rate. Always ask if your lender or broker can improve on their initial offer.
Lenders use debt service ratios two common formulas to find maximum loan amounts. In most cases:
- Your gross debt service ratio, which includes your projected mortgage, property taxes and utilities, can’t exceed 39% of your income.
- Your total debt service ratio, which includes your housing expenses and your monthly debts (car payments, student loans, credit card payments, child support, etc.) can’t exceed 44% of your income.
Don’t feel like you have to construct your budget around the highest possible amount you can borrow. Even if a lender is willing to approve a particular amount, it may not be affordable” for you in the long run.
The minimum credit score for a traditional mortgage with a mainstream lender is usually around 680. You might still qualify for a mortgage with a B-lender if your credit score is lower, though they typically charge higher interest rates.
If you have the option of waiting, you could put buying on hold in order to build your savings, improve your credit score and try to qualify with an A-lender.
The amortization period is how long it will take you to pay off your mortgage in full. Most Canadians choose amortizations of 25 years or less. Your monthly payment will be smaller if you pay off your mortgage over a longer period of time, but you could pay much more in interest.
According to a recent announcement from the Department of Finance, 30-year amortizations will be soon available to all first-time home buyers and anyone purchasing new construction. These changes will go into effect December 15, 2024.
In some cases, you can opt to pay your property taxes as part of your monthly mortgage payment. This isn’t mandatory, but bundling the two costs means one less payment for you to keep track of.
Mortgage Affordability Calculator
Crunch the numbers to compare rates and terms,
and know how much mortgage you can afford.
Prepare for your first foray into the housing market
Assemble your real estate team
Whether or not you’re a first-time home buyer, it’s inevitable that you’ll bring in a professional or two to help complete the home buying process. You’ll generally need to find:
- A real estate agent or Realtor. You don’t need to hire an agent to help you find a home, but their local expertise and negotiating experience may be invaluable. As a buyer, you don’t pay commission to an agent or Realtor.
- A mortgage professional. You can’t get a mortgage without either a bank’s mortgage advisor or an independent mortgage broker underwriting your loan and explaining the terms of your mortgage.
- A real estate lawyer. Another must-have, if only to look over the details of your purchase agreement and ensure you understand them.
Finding real estate professionals can be somewhat stressful since you’ll want to find people you can trust. Start by asking your friends and family for recommendations.
If necessary, expand your search to the internet. Look for a combination of positive customer reviews and extensive local experience.
Understand local housing conditions
One of the biggest challenges first-time home buyers face is entering a competitive housing market. Navigating it in a productive way requires focusing on current, local conditions.
National housing statistics, like those released each month by the Canadian Real Estate Association, are useful for the media. But they don’t provide much value for individual home buyers because they’re heavily influenced by sales and prices in Vancouver and Toronto.
To get an accurate sense of how much properties cost where you intend to buy, get familiar with Realtor.ca, where you can search current listings based on location, price and property details.
If you want data, focus on what’s made available by either your provincial or municipal real estate board.
Much of the information you seek should be provided by the real estate agent or realtor you decide to work with.
Brace for a bidding war
There’s a real possibility that several other buyers might challenge you for the home you want to buy. Once Canada implements two new demand-generating mortgage rules on December 15, 2024, the possibility of finding yourself in a bidding war will likely increase.
Bidding wars are dangerous because the emotions involved can cloud a person’s judgment and lead to overbidding. It’s important that you listen to your real estate agent and mortgage advisor and put a hard cap on the amount you can offer on a home, even if that means missing out on your dream home.It’s better to come to terms with how tight the market is before wading into it. 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.
Incentives, tools and assistance for first-time home buyers in Canada
The government of Canada offers a variety of national programs to people buying their first home. Generally, you’ll be considered a first-time home buyer if you or your common-law partner has never owned a home or investment property. Some programs have exceptions, such as if you have recently experienced a breakdown of a marriage or a common-law partnership. Additionally, these programs may extend to permanent residents and non-permanent residents authorized to work, in addition to Canadian citizens.
The RRSP Home Buyers’ Plan
Homebuyers can withdraw up to $60,000, tax-free, from their registered retirement savings plan (RRSP) to put towards a home purchase.
- Funds must be paid back within 15 years.
- RRSP funds must be in your account for at least 90 days.
- You have until October 1 of the year following your withdrawal to buy or build your home.
More information: NerdWallet’s guide to the RRSP Home Buyers’ Plan.
The Home Buyers’ Tax Credit
A non-refundable income tax credit of up to $10,000 for first-time home buyers. It results in a $1,500 tax rebate.
This won’t help you get a house any sooner — it doesn’t kick in until the first tax return after you’ve bought a house — but it will make that first year of homeownership a little more affordable.
More information: NerdWallet’s Home Buyers’ tax credit guide.
The First Home Savings Account
Route your savings for a new home through this account and save on taxes.
- The FHSA operates a little like an RRSP and a little like a TFSA.
- Each year, you can deposit up to $8,000 in your FHSA, up to a total limit of $40,000. Deposits are tax-deductible.
- You can invest your deposits. Any earnings are tax-free.
- You can tap the account for down payment funds and closing costs.
More information: NerdWallet’s First Home Savings Account guide.
Provincial programs for first-time home buyers
You may be able to use local and provincial first-time home buyer programs, including programs that offer interest-free loans you can use for a down payment. Details vary from program to program, so you’ll want to explore the programs where you live.
First-time home buyer checklist
Firm up your credit score.
- Access your credit score for free to see where you stand now.
- Check the report for any lingering issues or mistakes.
- Decide if there are debts that can be paid down quickly, which could improve your score.
Create an initial budget
- Confirm the down payment savings you have available.
- Add up your household monthly income and subtract recurring debt payments and monthly expenses.
- Use a mortgage affordability calculator to estimate mortgage payment amounts.
Get pre-approved for a mortgage
- Contact your bank or a mortgage broker and assemble the list of documents required for pre-approval.
- When pre-approval is complete, review your mortgage options.
Be specific about what you’re looking for
- Based on your pre-approval amount, research homes available within your budget.
- Make a list of “must-haves” for the home you buy, including location and neighbourhood amenities.
- Make a list of “nice-to-haves” that you’re willing to compromise on.
Find a real estate agent to work with
- Ask friends and family if there’s a local agent they would recommend.
- Interview a few agents until you find one you’re comfortable with.
- Discuss your must-haves and nice-to-haves with your agent.
View properties and make offers
- Ask your agent to explain the various conditions sellers might require when accepting offers.
- Factor in the taxes, insurance, upkeep and repairs you’d be paying for as a homeowner.
First-time home buyer FAQs
Canadian first-time home buyers can use the Home Buyers’ Plan, the First Home Savings Account and the Home Buyers’ Tax Credit to help make home buying more affordable. They can also access several provincial and municipal programs.
The long-term benefits of homeownership are hard to deny, but paying off a home at today’s prices can mean making significant lifestyle and spending sacrifices not everyone is ready for. The decision to rent or buy ultimately comes down to what you can afford and what you’re willing to give up.
DIVE EVEN DEEPER
Mortgage Payment Calculator
Use our mortgage payment calculator to estimate your monthly mortgage payments in Canada. Enter your loan details to get an accurate and quick assessment of your mortgage costs.
Canada’s New Mortgage Rules: Help Or Harm For Housing?
Two upcoming mortgage rule changes — affecting down payments and amortization periods — could have a major impact on your ability to buy a home.
12 Essential Tips for First-Time Home Buyers
Saving the right down payment, preparing for the mortgage stress test and looking for assistance programs are tips first-time home buyers can use to reduce stress and save money.
Hannah Logan
First-Time Home Buyer Grants and Assistance Programs
Various grants and assistance programs in Canada can make it easier and more affordable to buy your first home.