The newcomer's guide to home ownership

By: Jessica Wei on September 7, 2023
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Canada’s population has increased by 2.7% overall from Jan 1, 2022 to Jan 1, 2023.

This means that in 2022, the population grew by over an unprecedented 1 million people — more than any other year in Canada’s history.

Of this number, 437,180 were permanent residents, which exceeded the target of 431,645 new permanent residents, as outlined in the Government of Canada’s Immigration Levels Plan for 2022-2024.

Many look towards homeownership as a step towards succeeding in a new land and assimilating into Canadian culture. Here are some important things to know if you’re new to the Canadian real estate market.

Are newcomers legally able to buy a home in Canada?

All permanent residents, like citizens, are legally able to buy a home in Canada. Non-permanent residents, such as open work permit holders, or international students, may still be eligible to buy a home in Canada, subject to fulfilling certain criteria, including being able to provide proof of income and a larger down payment.

How do mortgages work?

The overwhelming majority of homebuyers aren’t able to buy a home outright in cash. Instead, prospective buyers with a decent amount of savings and a steady income may turn to financial institutions, like banks and other types of lenders, to apply for a mortgage.

A mortgage is a type of loan specifically used to buy a home that you apply for to buy a home. In exchange for the loan, your lender — whether it’s a bank or a private lender — charges interest. Typically, the interest rate you receive on your mortgage loan fluctuates with the overall health of the Canadian economy.

Once you purchase a home with a mortgage, you make regular payment instalments, which include paying towards the principal as well as the interest levied.

What are the qualification requirements for a mortgage?

Not everyone who applies for a mortgage may receive one, and there’s a limit to how much mortgage one can qualify for. Lenders typically issue mortgages to people who they believe are most likely to pay back the loan in full over an agreed-upon period of time. That’s why lenders will typically weigh the following factors when deciding whether to issue a mortgage and how much to loan out:

  • Credit History: The longer you have had credit accounts (such as a Line of Credit or credit cards), and a history of timely payment with low or no defaults, the more likely you are to be able to manage your finances and pay back your loans without incident.
  • Down payment-to-loan amount: A down payment is the money you provide upfront towards the sale price of the property. The financial institution will provide the remaining funds. Your mortgage amount will be the total property price, minus the down payment (and excluding any closing costs). According to guidelines set by the Canada Mortgage and Housing Corporation (CMHC), the down payment on a purchase price on a home under $500,000 should be at least 5% of the home value. For a home listed over $500,000, the down payment should be 5% of the initial $500,000 and 10% of the amount thereafter. Homes that exceed $1 million require a down payment of at least 20% of the total sale price.
  • Proof of income: Regular and stable income is also a solid indicator of whether or not someone can repay a large loan. Lenders may request a few pay stubs, or T1 or T4 tax forms. They may also require a letter of employment. Self-employed individuals will also need to provide proof of at least two years of income to secure a mortgage.
  • Home insurance: Most lenders will require proof of home insurance before approving a mortgage. As they still have an interest in your property till you repay the full mortgage amount, they need to know your property is protected.

How does interest on mortgages work?

There are two main types of mortgage interest options available to homebuyers: fixed or variable.

In a fixed interest rate mortgage, the interest rate and mortgage payment stay constant throughout the lending term. Buyers can choose from a mortgage term ranging from one year to 10 years — but most people opt for three- to five-year terms.

For a variable rate, the interest rate, and consequently the mortgage payment amount, can change depending on the prime rate, as set by the Bank of Canada. Within variable-rate mortgages, mortgage-holders can opt for a variable rate, which changes at any time with the overnight rate; or the fixed-payment variable rate, in which your payments stay the same, but the amount that goes towards interest will change based on overnight rate changes.

Related: All you need to know about fixed-rate mortgages and the interest rate differential

Budgeting basics:

The down payment and mortgage payments aren’t the only costs you’ll need to budget for.

Closing costs, which include legal fees, applicable condo fees, home inspection fees and others, can range anywhere from 1.5% to 4% of the sale value of the property. Property tax rates should also be factored into your budget. They’re paid twice a year and range from 0.5% to 2.5% of the sale price, depending on where you choose to live. Overall, be prepared to have a buffer of around 6-7% of the sale price of the property.

What is CMHC mortgage insurance?

If your down payment is less than 20% of the total sale price of the home, it is a federal requirement to have mortgage loan insurance. This is for the protection of the lender in the event of non-payment against the mortgage. CMHC (Canadian Mortgage and Housing Corporation) is one of the most widely known mortgage insuring providers. If your home is worth over $1 million, it cannot be insured, so you’ll not only have to pay at least 20% of the house price in down payment, and pay higher interest rates because the mortgage is uninsured. 

How to find the best home for your budget and location

There are many factors that go into choosing the best home for your needs. The first step towards finding the home of your dreams is to understand how much house you can afford. Prequalifying for a mortgage before you start your home search will help you narrow down your options and prevent you from the broken heart that often accompanies falling head over heels for a home that you can’t afford.

Secondly, consider your priorities. If you’re a parent of a young child, you’ll likely want to find a home in a safe neighbourhood, perhaps near good schools, and close to parks and public amenities. If you don’t drive, easy access to public transit will be top of mind for you.

Buying a home as an immigrant might be daunting, but taking the time to learn the details of the homeownership process will make the journey much smoother.

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