First-Time Home Buyer’s Guide: 10 Steps For Buying Your First Home

With very high housing prices across the country (the October 2023 national average is $656,625, according to the Canada Real Estate Association), saving up for a down payment can be one of the most daunting aspects of home buying, especially for first-time buyers.

So how much do you need to save? The amount you need for a down payment depends on the purchase price of the house:

For instance, if you want to purchase a home for $650,000, you will need to pay 5% on the first $500,000 ($25,000) and 10% on the remaining $150,000 ($15,000). That’s a down payment of $40,000 in total.

Your down payment must come from one of three sources:

• From the sale of your home (which isn’t possible with a first-time buyer)
• Self-funded from your savings, a withdrawal from your RRSP (via the Home Buyers’ Plan), a sale of investments or a loan against a secured asset, such as a HELOC (home equity line of credit)
• A non-repayable gift from an immediate family member

Another important thing to note: if your down payment is less than 20%, you’ll also need to pay for mortgage default insurance, also known as mortgage loan insurance or a high-ratio insured mortgage. The cost is calculated as a percentage of the principal of the loan and can add up to 4% on the cost of your mortgage. You can pay this upfront or it can be tacked onto your mortgage payments.

The bigger your down payment, the lower your monthly mortgage payments and the amount of interest you’ll pay over time. However, mortgage rates for an insured mortgage are generally slightly better than for uninsured mortgages.

Your down payment is just one of the costs of purchasing a home. When deciding if you can afford a home, you’ll need to consider the following expenses associated with both buying and owning a home:

Home Buying Expenses

Closing costs: It’s a good idea to budget between 3% and 4% of the purchase price of a resale home to cover closing costs, or the one-time expenses associated with buying a home. On a $650,000 home, that’s $19,500, assuming 3% in expenses. (This figure may be much higher, especially in urban areas.) These can include:

• House appraisal or property evaluation fee: This may be required by your lender to determine if the asking price is reasonable. Estimated cost: $300.
• Land survey: If the seller cannot produce an up-to-date survey, you may need one before finalizing the mortgage. Estimated cost: $1,000 to $2,000.
• Title insurance: When you purchase a home, the seller transfers the property’s deed to you. The deed shows who has title, or legal ownership of the property. Title insurance protects you against any losses due to title defects or challenges to your ownership of a property. Estimated cost: $400.
• Legal fees: This covers legal services such as conducting a title search, drafting the deed and preparing the mortgage. Estimated cost: $500.
• Land transfer tax: This tax is based on the purchase price of a resale home. Estimated cost: differs between provinces.
• Adjustments: You may need to pay interest adjustments or property tax adjustments, depending on the day you close your house.

Home inspection: A home inspector will visually evaluate the inside and outside of a home to look for any defects or issues that may need work. An inspection can cost between $500 and $600.

Moving costs: Hiring professionals can take the stress out of asking friends and family to help with a move. The cost to hire professional movers will vary, depending on the size of the move (for example, a two-bedroom apartment is cheaper to move than a four-bedroom house), the distance travelled and the amount of time the movers are on the clock. Depending on these factors, budget for between $500 and $2,000.

Incidental costs: These include things like charges for utility hook-ups, mail redirecting, cleaning supplies, new appliances and window coverings (if not included in the sale), as well as tools for property maintenance, such as a lawn mower or snow blower.

Rural property costs: If you’re buying a property on a well, you’ll need to arrange for a water quality inspection to ensure the water is potable. If your property has a septic tank or wood burning stove, it’s smart to have those inspected to ensure they are functioning properly. (Your home insurance may require this.)

To get a sense of how quickly these costs can add up, here’s a summary of what to expect for the costs associated with buying a $650,000 home with a $40,000 down payment in the Toronto area:

Home Owning Expenses

Annual upgrades and maintenance: An oft-quoted rule of thumb is to save a minimum of 1% of your home’s value each year for maintenance and repairs. Assuming a $650,000 home, that’s $6,500 each year. It’s important to remember that rules of thumb are simply a rough idea of the expenses. Your costs may be more or less depending on your property.

Utilities: With a rental unit, your rent may be all inclusive, or you may pay for certain utilities, such as electricity. However, as a homeowner, you are responsible for all your home’s utilities, including heat, electricity, water and possibly the hot water heater or water softener. Factors, such as the age of your home, will affect how much you pay each month; an older home may be less efficient or well insulated and therefore cost more to heat, for example.

Property taxes: Property taxes are charged by your municipality to finance community services, such as road maintenance, schools and emergency services. Each province has its own methodology for calculating property tax and rates can vary significantly between municipalities. But in short, property tax is the property value assessment (which is different from market value) multiplied by the municipal tax rate. This tax can be added to your mortgage payment or you can pay your municipality directly.

Home insurance: As a tenant, you’re likely used to paying tenant insurance, also known as renter’s insurance. But when you become a homeowner, the asset you are protecting becomes much bigger and therefore, house insurance is more expensive. While home insurance may not be mandatory under provincial legislation, your mortgage lender will likely require it. Home insurance premiums depend on factors such as:

• Type of house (single family, semi-detached, townhouse)
• Material your house is made of (brick, siding, wood)
• Value of your property and its contents
• Crime rate in your neighbourhood
• Proximity to a fire station or fire hydrant

Condo fees (if applicable): When you buy a condo, you’re buying into a share of the common elements of a building or neighbourhood. While you’ll pay condo fees each month, the condo corporation likely takes care of landscaping, snow removal, and repairs and maintenance. Fees can range from $50 to $1,000 plus per month, according to RE/MAX Canada.

Your lender will look at your monthly housing costs against your income to determine if you can afford to buy a home. As a general rule, your monthly housing costs shouldn’t be more than 39% of your average gross monthly income. This percentage, known as your gross debt-to-income ratio or gross debt service ratio (GDS), includes your monthly mortgage payment, property taxes, heating expenses and 50% of condo fees.

There are a number of incentives available, especially for first-time home buyers, to help make home ownership more affordable. For example:

First-Time Home Buyers Incentive (FTHBI): This federal program helps first-time home buyers get into the market by boosting their down payment amount by 5% or 10% with an interest-free loan that must be repaid when the house is sold or after 25 years, whichever comes first. The deadline for new applications and resubmissions for this program is now March 21, 2024. No new approvals will be granted after March 31, 2024. After this date, the program will be discontinued. Read our Feds Scrap First-Time Home Buyer Incentive Program article to learn more.

RRSP Home Buyers Plan (HBP): This program allows you to withdraw up to $35,000 tax-free from your RRSP for a down payment towards a new or resale home. The funds need to be repaid to your RRSP within 15 years, with repayments starting two years after the initial withdrawal.

First Home Savings Account (FHSA): Introduced in April 2023, the First Home Savings Account is a registered plan that helps first-time home buyers save for a down payment. Combining the features of an RRSP and a TFSA, contributions are tax-free (up to the plan’s annual and lifetime caps) and the amount withdrawn is not taxable.

First-Time Home Buyers’ Tax Credit (HBTC): While not an alternative, per se, the HBTC helps make home ownership more affordable by offering a maximum $1,500 tax rebate to help cover closing costs and legal expenses.

Your credit score is a three-digit number between 300 and 900 that shows how well you manage credit and informs lenders how risky it would be to loan you money. While lenders have their own rubrics for evaluating risk, a good credit score starts around 660, and is typically seen as the benchmark for getting a mortgage. However, with a high-ratio mortgage (that is, an insured mortgage with less than 20% down payment), you may be able to qualify with a credit score of 600, according to the Canada and Mortgage Housing Corporation.

Your credit score arguably matters more on a mortgage application than with any other type of personal financing. Not only does your credit score affect your ability to be preapproved for a mortgage, higher credit scores generally get you a lower (therefore better) interest rate.

You can request your credit report from one of Canada’s two main credit bureaus, Equifax or TransUnion. If you find your credit score is low, you can work on repairing your credit history by paying your bills on time, consolidating your debt or paying it down to lower your credit utilization.

It’s a good idea to get a mortgage preapproval before you start looking for a house so you know what you can afford. A mortgage preapproval verifies how much a lender is willing to lend you considering factors such as your income, down payment, debt level, assets and credit score. A pre-approval is different from a pre-qualification, which is self-reported and not verified by your lender. With a preapproval, your lender will evaluate the documents you provide and perform a hard credit check. However, a preapproval is not a guarantee that you’ll secure a mortgage.

Related: Five Things You Need to Be Preapproved for a Mortgage

A mortgage preapproval will list details such as the mortgage term, interest rate and principal amount. A lender will typically offer a rate of 60, 90 or 120 days. If interest rates go up during that time, your lender should honour that held rate provided you meet all other conditions of the loan.

At the preapproval stage, you can decide whether you should choose a variable-rate or fixed-rate mortgage, the term of your mortgage (typically three, five or 10 years) and the amortization period.

Before you even start scrolling on Realtor.ca, it’s a good idea to know what kind of house you’re looking for, as your choice will impact your lifestyle as well as your finances. Your preferences can evolve over time, but having a targeted wishlist can keep you on track—and on budget. Details to consider include:

Location: The location of your home—big city, suburbs, village or country—will impact the purchase price of your home as well as your way of life. If you have young kids, proximity to a good school or bus route may be a non-negotiable on your wish list. If you commute to work, will you drive or will you take public transportation? Do you want the buzz of a big city or the slower pace of a small town? Try to think past the romantic notions of each choice: rural living may seem quaint at first, but may feel isolating after a while.

Age: A century home may be full of charm but the upkeep (and maintenance) can be costlier than a newer home.

Type: Are you looking for a detached, semi-detached or townhouse? Each has its own upsides and downsides. For example, a four-storey townhouse might not work as well as a detached bungalow for a family with young children.

Condo or freehold: With a condo you own the interior of the home, while with a freehold, you own the entire home and the land. Condos may be cheaper to buy and maintain, but you’ll be on the hook for a monthly condo fee in addition to your mortgage.

Size: Are you thinking of adding to your family in the next few years? If so, consider buying a house with room to grow.

Renovated or fixer-upper: Buying a house “as is” can save you thousands of dollars initially, but if you need to hire contractors to do the work, any savings will quickly be mitigated.

Resale or new build: Existing houses are usually found in more established neighbourhoods with mature trees and landscaping, but with a new build, you can customize your home up front, saving you renovations or upgrades down the line.

Large or small lot: You might love the look of a large corner lot, but are you willing to spend the time (and money) on landscaping and maintenance? Is the lot fenced? If not, that may cost you thousands of dollars in the future.

In addition to your mortgage lender or broker, you’ll need a team of professionals to help make the purchase of your first home go smoothly:

Real estate agent: Your real estate agent will help you find properties according to your wishlist, answer any questions and negotiate the best deal. Typically, the seller pays commission to the agent.

Related: Is Buying A House Without A Realtor A Good Idea?

Insurance broker or agent: You’ll need house insurance to cover the replacement cost of your home in the event of damage or disaster. If you already have car insurance, check with your broker or agent if you get a discount by bundling that with a home insurance policy.

Real estate lawyer: You’ll need a real estate lawyer or notary to review the purchase agreement, complete the title search and arrange for title insurance, calculate the land transfer taxes and adjustments for property taxes, draw up the mortgage documents, register the transfer of property, close the transaction and exchange legal documents and keys with the seller’s lawyer.

Home inspector: While a home inspection isn’t necessary (and may, in fact, be frowned upon during a hot housing market when multiple buyers put competing offers on the same property), it can prevent costly surprises after the deal is closed. No first-time home buyer wants to discover their basement floods each spring or the roof needs to be replaced.

Depending on the property and your lender’s mortgage application requirements, you may also need to hire an appraiser (to confirm how much a property is worth) or a land surveyor, to conduct a survey to verify the property’s boundaries.

When you’ve found the right house, it’s time to put together an offer. You already have a mortgage pre-approval to show the sellers you’re serious about the offer and you know the maximum amount you can afford.

Your real estate agent will direct you on the particulars of your offer, but it typically should include:

• Your legal name, the name of the seller and the legal address of the property
• The purchase price
• Your deposit (this is usually paid within 24 hours of your offer being accepted)
• Any extras you want included in the offer, such as appliances or window coverings
• The closing date, or the date you take possession of the house (usually from 30 to 60 days for resale homes)
• The date the offer expires
• Any conditions that must be met, such as a satisfactory home inspection or a lender approving your financing

The sellers may come back with a counter offer that you can either approve, reject or amend. Ultimately, you’ll need to decide what you’ll accept or when it’s time to walk away. We’ve all heard about houses sold for tens of thousands of dollars over asking during a bidding war. We’ve also heard about new buyers being house poor, where people bought homes well beyond their means.

If your offer is accepted, you’ll need to return to your lender to apply for your mortgage. Remember the mortgage preapproval is not guaranteed and is not linked to any specific property. You’ll also need to pass the mortgage stress test and prove that you’re able to afford a mortgage at a rate higher than the one you qualified for; specifically, the higher interest rate of either 5.25% or the interest rate you negotiate with your lender, plus 2%. This means, if you’re offered a mortgage at 6%, you’ll need to prove affordability at 8%.

Your lender or broker will request a list of documents that may include:

• The property listing
• Legal description of the property
• A home inspection report
• Building specifications
• A land survey
• Most recent property tax assessment
• Heating and utility costs
• An appraisal report
• Purchase and sale agreement (signed)
• Name, address and telephone number of your lawyer or notary

If don’t have a mortgage preapproval, you’ll also need to provide information about your financial situation, including:

• Savings or investments statements for the last 90 days
• Gift letter for a down payment, if applicable
• Withdrawal from an RRSP or investment account, for your down payment, if applicable
• Employment verification, including pay slips, T4s or Notice of Assessments
• Total debts and monthly expenses
• Financial details from your guarantor, if required

The waiting is over and the closing day has arrived. This is the day you take legal possession of your new home.

After all the work getting here, closing the deal is (usually) a straightforward process:

• Your lender gives the mortgage money to your lawyer or notary, in trust.
• You give your down payment (minus the deposit) to your lawyer or notary, along with the closing costs.
• Your lawyer or notary pays the sellers and registers the home in your name.
• Your lawyer gives you the keys to your new home.

A lot of work goes into buying a home but remember this: a common guideline is that it’s prudent to stay in a home for at least five years. (This is known as the Five Year Rule.) Otherwise you’re going to take a hit financially, losing money to closing costs and the fact that the first five years of your mortgage payments go mostly to interest.

What’s more, buying your first-house is about more than building equity: it’s about building a new life in a place you get to call home.

Related: How Much Does It Cost To Build A House In Canada?