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Buying a house in Canada: A guide to buying your first home

Keph Senett

By Keph Senett

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Updated: October 25, 2024

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Across Canada, many are taking the plunge into homeownership, knowing that it’s one of the best long-term investments they can make.

Whether you’re buying a house, condo, or townhome, the process can be a bit daunting, and you may not be sure where to start. Read our step-by-step guide about buying your first home in Canada, so you can close with confidence.

Step 1: Saving for a down payment on a home

Before you start shopping for real estate, your first step is to save money for a down payment. A “down payment” is the amount of money you put towards purchasing a home. In general, the larger your down payment, the easier it is to obtain a mortgage.

As you start saving, you might ask, “How much do I need to save for a down payment?” The minimum amount depends on the home’s purchase price. In Canada, people typically spend between 5% and 20% of the purchase price on a down payment.

How can you save for a down payment? Start by opening a high-interest savings account and setting up an automated savings plan. The EQ Bank Savings Plus Account is an excellent choice with an everyday interest, no fees and no minimum balance.

Another reason to beef up your down payment is to avoid paying the Canada Mortgage and Housing Corporation (CMHC) mortgage default insurance. This hefty expense, calculated based on the mortgage and down payment size, is designed to protect the lender and typically can only be foregone with a down payment of 20% or more. So start saving now!

Step 2: Saving for closing costs when buying a home

While saving for a down payment should be a top priority, put aside some money (generally 1.5 to 4% of the home purchase price) to cover future closing costs.

These are legal and administrative fees paid at the closing of a real estate transaction and generally range from 1.5% to 4% of the selling price. It’s important to save for these expenses before buying a home so you’re not in the red when it’s time to close on your home.

Closing cost
Details
Land transfer tax
Calculated as a percentage of the cost of your home, this tax varies by province and municipality. Note that in Ontario, British Columbia, and Prince Edward Island, and in the City of Toronto, first-time home buyers are eligible for a tax rebate for this expense (more on this later).
Legal fees
You will need a lawyer to prepare your documents. Expect to pay around $1500 in legal fees and disbursements.
Title insurance
Some lenders require this insurance to protect themselves in case of an ownership dispute. This is purchased through your lawyer and usually costs up to $300.
Mortgage default insurance
Known as “CMHC insurance,” this is a mandatory insurance policy for those who purchase a house with less than a 20% down payment
PST on Mortgage Default Insurance
Buyers have to pay sales tax on the CMHC insurance at the time of purchase
GST/HST on a New Home Purchase
If you’re buying or building a new home or condo, tack GST/HST onto the purchase price.
Home inspection (optional)
Though not mandatory, it is highly advisable to include a home inspection as a condition of your offer. This inspection could reveal invisible problems with the property before you buy. It costs around $500 per inspection

This is not an exhaustive list—it doesn’t include property taxes or utility bills, for example—but it gives an idea of possible closing costs.

One savvy saving strategy is to set up a Tax-Free Savings Account (TFSA) to act as your “closing cost fund.” As the name suggests, there’s no tax owed on the balance, interest, dividends, or capital gains—and it can be withdrawn tax-free. You can see how this might be a great place to stash and grow your funds. At the same time, the money is easily cashed out if needed for your closing costs.

Read more: The best high interest savings accounts in Canada

Step 3: Preparing your finances before home ownership

Get your finances in order before cruising the real estate listings. This process will help you estimate how much you can afford to buy and organize critical documents required to support a mortgage application.

Check your credit score

A credit score is a rating (between 300 and 900) used by lenders to assess the amount of risk they face in extending credit to you. Generally, the lower your score, the less likely you are to be approved for a loan. Checking your credit rating allows you to see where you fall on the scale and figure out how to improve your credit score before submitting a mortgage application. If your score is lower than you’d like, there are actions you can take.

READ MORE: How to Boost Your Credit Score (Fast)

Organize your documentation

There are three things a lender will look at before giving you a mortgage: your current assets (what you own), your income, and your current level of debt. During the application process, here are a few items that your mortgage lender may request from you:

  • Government-issued photo identification (driver’s license, passport, etc.)
  • Proof of employment and income (pay stubs, T4s, income tax returns, bank statements, etc.)
  • Proof of a down payment and where it will come from (e.g., savings account, RRSP, the sale of another property, gift, etc.). If a family member is contributing towards your down payment, you’ll also need a signed letter from them acknowledging the purpose of the gift and confirming that it is non-repayable.
  • Information about any other assets
  • 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)

Having these documents handy is a house-hunting hack – it will ultimately prevent you from scrambling to get your act together at the last minute.

Read more: The best online mortgage lenders in Canada

Step 4: Getting a mortgage pre-approval in Canada

With your finances in order, the next step is to figure out how much you can afford. A mortgage calculator is a good place to start, as you can factor in the amount of your down payment, your amortization (repayment) schedule, total selling price, and so forth to come up with a budget.

If you want something more official, go to a mortgage lender and get pre-approved. This means that a potential mortgage lender looks at your finances and determines how much they will lend you and at what interest rate they will charge you.

It’s a bit of work, but pre-approval lets you:

  • Know the maximum amount of a mortgage you could qualify for
  • Estimate your mortgage payments
  • Lock in an interest rate for 60 to 120 days, depending on the lender

A pre-approved is not mandatory, but it’s strongly advised. A pre-approval determines the home price you can afford, essentially setting your house-hunting budget.

In fact, some real estate agents require it before they will work with you. Having pre-approval signals that you’re a serious and eligible buyer and helps avoid the heartbreak of finding your dream home, only to realize it’s way out of your budget.

One caveat: a mortgage pre-approval does not guarantee financing, and when making an offer, it’s not necessarily “safe” to remove the financing condition.

Once your offer is accepted, you’ll need to go back to your mortgage lender to get the official stamp of approval.

Read more: How much mortgage can I afford?

Step 5: Tapping into first-time home buyer incentives

Speaking of saving money, don’t forget to take advantage of these first-time homebuyer incentives in Canada. It could save you some serious dough.

Popular First-Time Home Buyers Incentives

Incentive
Details
RRSP Home Buyer’s Plan
Allows first-time homebuyers to withdraw up to $35,000 from their RRSP (or $70,000 for a couple) to finance a down payment. The RRSPs must be at least 90 days old, and you must sign an agreement to build or buy a home; but as long as you repay within 15 years, the withdrawal is tax-free.
First-Time Home Buyers' (FTHB) Tax Credit
Offers a $5,000 non-refundable income tax credit amount on a qualifying home acquired after January 27, 2009. For an eligible individual, the credit will provide up to $750 in federal tax relief.
GST/HST New Housing Rebate
Reimburses eligible homeowners for part of the GST/HST paid on the purchase price or cost of building a new house, on the cost of substantially renovating or building a major addition onto an existing house, or on converting a non-residential property into a house.
Mortgage default insurance
Known as “CMHC insurance,” this is a mandatory insurance policy for those who purchase a house with less than a 20% down payment.
Land Transfer Tax Rebate
First-time home buyers in British Columbia, Ontario, or Prince Edward Island can receive a rebate on a portion of the land transfer tax that they paid. Also, first-time homebuyers in the City of Toronto are also eligible to receive a rebate on the city’s land transfer tax.

READ MORE: How to use the Home Buyers Plan

Step 6: Start house-hunting!

You’ve got some money in the bank and a pre-approval in your hands. This is the exciting part of the home buying process. It’s at this stage you’ll want to seriously consider working with a real estate agent. This is not mandatory. Buyers can manage their own sales, but it’s advised, especially for first-timers.

Real estate agents have expert information on every step of the process, which can help relieve stress. They are also part of a professional network of inspectors, insurance agents, and so forth who may become part of your team.

Read more: Real estate agent commissions decoded

Finding the best mortgage rate before buying your home

Since interest rates are constantly fluctuating, it’s important to shop around and find the most competitive mortgage rates. The process can be time-consuming, so we recommend using an online mortgage broker, like Homewise which can provide you with the most competitive rates from top lenders. Its online platform is very user friendly, and once you complete your application, you’ll get rates in just minutes. A mortgage expert will guide you through all the steps to get you the best mortgage for your needs. Even after you’ve secured a deal, you can still get help by sending your questions to an advisor through a dedicated text line.

Types of mortgages

There’s no one type of mortgage that fits everyone. Your best bet is to shop around and pick something that works for your life circumstances and budget. Here’s a broad overview to help you decide the best option for you.

Type
Description
Open/closed:
The terms “open” and “closed” refer to the level of repayment flexibility. With a closed mortgage, you can’t renegotiate, refinance, or repay except according to the terms of the mortgage. Open mortgages are more flexible, but also typically have higher interest rates.
Low ratio/high ratio:
This refers to the percentage of a down payment. In a low ratio mortgage, the down payment is 20% or more.
Fixed rate/variable (adjustable) rate:
If your interest rate is fixed, it is immutable for the term of the mortgage. With a variable or adjustable rate mortgage, the interest rate may be reviewed and changed at intervals throughout the term.
Home equity line of credit (HELOC):
This is a way to borrow money against your current home’s equity, but it can also be used instead of a traditional mortgage.

In Canada, mortgage repayment terms usually run between 5 and 30 years, with longer terms typically commanding higher interest rates.

The bottom line

Buying a first home can be a daunting experience for anyone. Long before the fun part—the actual search for your dream home—you have to figure out your finances, identify and exploit saving opportunities, get pre-approved for a mortgage, and hire your real estate agent, lawyer, and other professionals.

It might seem overwhelming, but it’s worth it for many millennials to become a homeowner. If that’s you, this guide will help you get one step closer to having the keys to your new home in hand. Good luck!

Read more: What is a mortgage? 

With files from Lisa Jackson

Keph Senett Author

Keph Senett is a Canadian freelance writer whose areas of expertise include personal finance, travel and sports. When not writing, she spends her free time trying to figure out how to qualify for a soccer squad in Asia, Australia, or Antarctica.

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