Things First-Time Home Buyers Need to Know in Canada

If you are wondering what to do when buying a house for the first time, there is a lot of information available. Thanks to the Internet, there is no limit to the advice and resources you can find to help you make one of the biggest purchases of your life. But sometimes, the information can seem overwhelming. That’s why we’ve put together a first-time home buyer 101, so you’ll know what to look for when buying a house and can get plenty of valuable first-time home buyers tips. Keep reading for things first-time home buyers should keep in mind when buying property in Canada.

First time home buyers in Canada

Choose a Real Estate Agent

Unlike most of the purchases we make in our lifetime, buying a home requires careful attention. Something to keep in mind for first-time homebuyers is that in addition needing a real estate lawyer to help with the transfer of deed, title search, and other paperwork, you will also need a real estate agent to help you buy your home. A trusted real estate agent can explain the ins and outs of the home-buying process and they will be familiar with the neighbourhoods you are considering, meaning they can set realistic expectations about home prices.

It is not difficult to find a real estate agent, but it will take some research on your end to find someone who is best suited for you and your purchase. There are online directories you can use to find agents in your area, or you can contact your neighbours or friends and family that live nearby for recommendations. Choosing the right real estate agent may take some work but it will pay off in the long run.

Know Your Tax Credit Options

The Government of Canada provides a tax credit for first-time home buyers. Your province or territory may also provide incentives for buying a home. After you purchase your first home and submit a tax return, you can access this tax credit. It is an effective way to offset some of the upfront costs that come with purchasing a home. If you are an eligible homebuyer, you can apply for the First-Time Home Buyer’s Tax Credit—a $5,000 non-refundable tax credit, which equates to a total tax rebate of approximately $750. Do your research and speak to your real estate lawyer and your local government to find out if you are eligible for any other tax credits.

Explore Incentive Programs

As a first-time home buyer, you may also be eligible for the First-Time Home Buyer Incentive. Through the program, the Government of Canada offers first-time home buyers 5% of the purchase price of an existing home or 5% or 10% of the purchase price of a newly constructed home. The goal is to help make the initial home purchase easier on first-time home buyers; however, you will need to repay the incentive after 25 years or upon selling your home.

Alternately, you may be eligible for the Home Buyers’ Plan (HBP) which allows you to withdraw up to $35,000, tax-free, from your Registered Retirement Savings Plan (RRSP) to buy a home. Much like the First-Time Home Buyer Incentive, though, you must repay the amounts you withdrew within 15 years.

Know Your Down Payment Amount

When looking for a home to purchase, you need to be realistic as to whether you can afford the down payment and mortgage payments. After you find a home that you can financially manage, you need to consider how much of a down payment you will need to pay. This amount depends on several factors such as the cost of your home, the type of mortgage you choose, and standard closing costs for buyers in your market.

You will also need to have enough money in the bank to cover the following costs.

Earnest Money

The deposit you made on a home when you submitted an offer is known as earnest money. This amount depends on the market but is usually 1-3% of the offer price. If the seller accepts your offer, these funds are applied toward your closing costs. If it is rejected, you get this money back.

Down Payment

The down payment is the percentage of the total home price that you need to pay at closing. The more money you can put down upfront, the lower your mortgage payments will be. Most loans require a down payment 20% of the purchase price, but some first-time homebuyers can opt for a lower down payment by also purchasing mortgage insurance.

Closing Costs

After the seller has agreed to sell you their home, there are certain fees you must pay at the settlement. Your closing costs typically include lender charges, an appraisal, inspections, survey, attorney fees, taxes, title insurance, and any other expenses that apply to your situation. It is recommended that you seek an estimate of your total closing costs from your real estate lawyer so that you can prepare for these expenses.

Consider Your Mortgage Options

In Canada, there are a few mortgage options you can choose from. Here’s what you need to know about the different types.

Fixed vs. Variable

When applying for your mortgage you can decide if you want a fixed-rate mortgage or a variable mortgage. A fixed-rate mortgage simply means that your rate will be consistent throughout the entire term of your mortgage. For example, if you chose a five-year fixed-rate of 3.25%, this is the amount that you will need to pay for five years. Many people choose fixed-rate mortgages because they know exactly what to expect and they can budget for it.

The other option is a variable mortgage rate which tracks the bank’s prime lending rate and is influenced by decisions of the Bank of Canada. If the lending rate rises, your mortgage rates will increase as well. This type of mortgage is a good option in a falling rate environment because you can have lower interest rates throughout your term. However, you run the risk of paying more money if interest rates spike.

Open vs. Closed Mortgages

Two other options to consider are open or closed mortgages. Open mortgages allow home buyers to pay their mortgage at any point without penalty. Closed mortgages only allow home buyers to pay a specific amount of a lump sum payment throughout the year. Closed mortgages come with lower interest rates, but open mortgages offer the flexibility of paying off your mortgage before the amortization period is up.

Set a Budget

Every homeowner needs a budget. In fact, experts recommend homebuyers devote one third of their monthly income to paying for housing costs. Before you do anything else, you should sit down and calculate how much it would cost for your mortgage as well as the additional costs such as home insurance, maintenance fees, and property taxes. Calculating your budget ahead of time will help you figure out how much you need to pay each month for your mortgage. You should not be spending more than 50% of your monthly income on housing as this will not allow you to save for retirement or have an emergency fund.

Research Upcoming Plans in the Neighbourhood

Aside from finding the home of your dreams you should also be considering the type of neighborhood and environment that surrounds it. Do some research to find out if there are any upcoming plans or developments in your neighbourhood. Will there be a large playground built next door? Does the area have plans to create a shopping mall or plaza? These features may either be a selling point for you or a hindrance to your decision to purchase the home.

Consider Other Expenses

In addition to your mortgage costs, you will also need to pay for other expenses such as property tax. In Canada, if your property is located within a municipality, you will also need to pay a municipal property tax. If you live outside of a municipality, you will need to pay a provincial land tax. Property tax is calculated based on the general municipal tax rate (if applicable), the education tax rate (depends on province), and the value of your property. A bill is normally sent in the mail to homeowners at the beginning of the year outlining how much property tax they owe.

Another expense you need to consider is whether your home will be subject to sales tax. Sales tax usually applies to newly built homes and is unlikely to occur on resale properties.

When moving day arrives, you need to decide if you will pay for a moving company. You may also have to pay to set up your Internet, landline, and utilities. Be sure to consider all the possible expenses that may come with your new home with your real estate lawyer.

Contact Zinati Kay – Real Estate Lawyers for Closing

Zinati Kay – Real Estate Lawyers is a full-service residential real estate law firm that provides fixed closing costs to our clients when they buy, sell, mortgage, or title transfer their property. If you are buying a home for the first time, we can help you ensure you have a smooth process and understand all the terms of the agreement. We will ensure you are aware of all the costs you need to pay, so there are no surprises. If you want a professional real estate lawyer in Toronto as you buy, sell, refinance, or title transfer your property, contact us at (416) 321-8267 for more information about our services.