Taking the leap into home ownership can be exciting and intimidating. For many people, buying real estate is the largest purchase they will make in their lives. And buying a home can become an important asset in your financial plan.
It’s a complex purchase that involves several steps and types of advisors along the way. Planning ahead is critical and involves deciding how much you can afford, and finding a financial advisor, lawyer, and a real estate agent to understand all the associated costs.
On this page you’ll find
Determining where to buy and how much you can afford
Knowing where you want to live may seem like a simple question, but it can make a big difference to how much you’ll be likely to pay for your home. Consider not just the city you want to live in but the kind of neighbourhood, and the kind of features you’d ideally like to have in the property you purchase. These details will be important when working with a realtor to search for your home.
Consider different neighbourhoods and research the current real estate market in your area. The city and neighbourhood you choose to live in will affect the price of the home, depending on the market conditions at the time. Unless you expect to be able to purchase the home outright, you’ll likely be paying for a home with:
- A down payment – at least 5-20% of the purchase price, depending on the price of the home.
- A mortgage – for the remaining amount of the price. A mortgage is a loan you repay over a set period of time, plus interest.
Consider how much you’re likely to pay in total for the type of home you want to buy. Then estimate how much you’ll need to pay as a down payment, in order to be able to afford the mortgage payments. Try our mortgage payment calculator to help you plan your payment schedule based on your expected term and interest rate.
Learn more about mortgage options and features.
Estimating how much you need to save for a down payment
The amount you need to make for a down payment on a home depends on a few factors. In Canada, your down payment needs to be a minimum of:
- 5% of the purchase price of the home if it is $500,000 or less.
- 10% if the purchase price is above $500,000 but less than $1 million.
- 20% of the purchase price if it is more than $1 million.
Your lender may require a larger down payment, depending on your credit history or employment status.
You also need to factor in the predicted total purchase price with the time horizon you’ll have to pay it back. Consider how long you’ll expect your mortgage term to be. For example, are you likely to be able to pay it back over 25 years or 30 years?
The more you’re able to pay as a down payment, the less you’ll have to pay back in mortgage payments later. You’ll need a bigger mortgage if you can only pay the minimum down payment. You will need to be confident you have a steady income to make your mortgage payments.
When estimating the cost of your future home, make sure you’re including more than just the cost of the home itself. Be sure to factor in any monthly fees, property taxes, renovation costs, and moving costs.
How to save for a home
Saving for a down payment is a large saving goal that can take several years. There are different ways you can accomplish this goal. In Canada there are three different types of registered savings accounts that can be used, depending on your situation:
- Registered Retirement Savings Plan (RRSP) – First-time home buyers can withdraw up to $35,000 from their RRSP towards a down payment. Recently, the federal government announced this will be increased to $60,000. You won’t pay tax on the money provided you re-pay the amount back into your RRSP within 15 years.
An RRSP is designed for saving for retirement. It is ideal for moderate to higher income earners who expect to have a lower income in retirement than they do before they retire. Learn more about RRSPs.
- Tax-Free Savings Account (TFSA) – You can withdraw funds from your TFSA without paying tax on the money. However, you’ll need to wait until the following year to contribute funds back into the account.
A TFSA can hold both savings and investments. Learn more about TFSAs.
- First Home Savings Account (FHSA) – The FHSA is a new account available to Canadians starting in 2023. Like an RRSP, contributions to the account are tax deductible, and like a TFSA, withdrawals towards a first home purchase are non-taxable. FHSAs can hold savings and investments, to a lifetime contribution limit of $40,000. Funds can be transferred from an FHSA to an RRSP. Learn more about the FHSA.
You can also save for your down payment in non-registered savings accounts or investing accounts. In this case your savings would not be tax-sheltered as it would be in one of the above registered accounts. That means you would pay tax on income earned from your savings interest or investment growth.
It’s also a good idea to speak with your family members about your plans to buy a home. They may be able to help with your down payment amount, or be able to recommend an advisor, lawyer, or mortgage broker to work with. It’s common for first-time homebuyers to get help from family members, and increasingly valuable given the rising cost of real estate in many parts of Canada.
Learn more about saving for a down payment.
Choosing the type of investments to put your money in will depend on your investing goals, your level of risk tolerance, and your time horizon. Learn more about investment types.
Financial considerations on the path to home ownership
There are a few things to be aware of as you get ready to buy a home. This includes knowing your credit score and getting preapproval for a mortgage.
1. Check your credit report and protect your credit score
You will have to pass a credit check to qualify for a mortgage. Lenders review your credit report and credit score.
- Credit report – Your credit report summarizes your credit history. Two credit bureaus, or credit reporting agencies, track your credit report in Canada. Whenever you borrow money, use your credit card or pay bills, information about those transactions is sent to credit reporting agencies. You can check your credit report once a year for free, or more frequently for a fee.
- Credit score – Your credit score is a number between 300 and 900 estimated by the credit bureaus. It shows how well you manage credit or how risky it would be for a lender to lend you money. The number changes over time as your credit report is updated with new information. Your credit score is affected by many factors, including your payment history, any outstanding debts, how long you’ve had credit, and if you’ve ever had record of insolvency or bankruptcy.
There are two credit bureaus in Canada – Equifax and TransUnion. Each of them allow you to check your credit report for free, by mail, once a year. It’s a good idea to get into the habit of checking your free credit report once a year, from both agencies. You can even check them six months apart from each other to make the most of your free report each time.
It’s a good idea to check your credit report before you expect to begin the mortgage pre-approval process. If there are any errors on your report, these may take time to resolve and delay your ability to be approved for the best mortgage rate available to you. Learn more about what’s included in your credit report and how to improve it.
Having a higher credit score, and a credit report that shows a history of being able to reliably pay back money owed, means you’ll be considered more credit-worthy by lenders. If you don’t have a credit history in Canada, you will likely need to start one to establish your ability to credit-worthiness.
2. Mortgage pre-approval
Mortgage pre-approval is an important step involved in your home purchase. It will give the seller confidence in your offer. If you don’t have financing arranged, it may be harder for you to close the sale once you’re ready to make an offer to buy a property.
Your mortgage pre-approval identifies the amount you will likely be allowed to borrow. This step involves working with a mortgage broker or lender. Your mortgage professional will need to know financial information, such as:
- proof of your assets and income
- proof you can pay for the down payment and closing costs
- information about any debts or financial obligations
- proof of employment
You may also be asked to provide recent financial statements from bank accounts or investments, to verify information.
The Financial Services Regulatory Authority of Ontario has information about mortgage brokering and more.
Understand how your mortgage works – fixed or variable rate, payment schedule, fees and any special conditions.
During the pre-approval process, be sure to ask your mortgage professional:
- How long the pre-approved interest rate is guaranteed (may be between 60 or 150 days).
- If the pre-approved interest rate will go down — if interest rates go down — during the time you’re pre-approved.
- Whether the rate assumes a fixed or variable rate mortgage.
- Whether the pre-approval can be extended.
Ask your mortgage professional about anything you don’t understand. Each lender sets their own guidelines and policies, so it’s important to make sure you understand the process.
Finalizing your home search
The search for your home can take time depending on your needs and the real estate market conditions. You can work with a real estate agent to help focus your search and get advice on how to make a successful offer. You may not have success on the first offer, but this is true for many first-time homeowners.
Your real estate agent can help you broker the offer, and you’ll need a lawyer to review all documents and close the sale.
Remember to review all documents carefully before signing and ask questions. The sale is a binding legal contract, so make sure you’re comfortable with the transaction before committing.
As a first time home buyer in Ontario, you may be eligible for a refund on all or part of the Land transfer tax.
Apply for the First-time Home Buyers’ Tax Credit (HBTC)
When you file your taxes, apply for the First-time Homebuyers’ Tax Credit (HBTC) if you are eligible. This is a non-refundable tax credit that can be claimed by you or your spouse on your annual income tax return. The amount is calculated based on your lowest personal income tax rate in the year you qualify, up to a maximum of $1,500.
Learn more about how the HBTC works.
Summary
Buying a home is one of the biggest decisions you might make in your life. Before you get too far ahead in your plans, make sure you:
- Decide where you’d like to live and how much you can afford.
- Know how much you’ll need to save for a down payment.
- Make a plan to save.
- Consider whether a TFSA, RRSP, or FHSA may be helpful for your saving plan.
- Check your credit report and protect your credit score.
- Get pre-approval for a mortgage.
And don’t forget to review all documents carefully on the road to home ownership.
