Do You Know What It Takes to Buy a Home in Canada?
20 tips from fellow immigrants, finance experts, and realtors
Buying a home is a big chunk of the Canadian dream. A dream most Canadian immigrants share, even if it isn’t top priority when you’re focused on settling down into your new city.
Regardless of when you plan to buy your first Canadian home, it is critical to learn about the process early. Learning from fellow immigrants’ experiences can help.
Uche Joel, co-founder of the Nigerian Canada Life community, recently hosted a X Spaces conversation on buying a property in Canada as an immigrant.
Dipo Salvador, a financial advisor at RBC, and Kristen Davis, a real estate expert, led the conversation while listeners also contributed with insights. We curated 20 important lessons and tips from the discussion.
Dig in.
1. Understanding available mortgage types is critical to making the right decision
To buy a home in Canada, you’ll likely need a mortgage. A mortgage is a loan from banks or credit unions to finance the property purchase, repaid over years through monthly payments.
When taking out a mortgage, you have to make a down payment, a percentage of the property’s full cost. Understanding the mortgage types is important because the required down payment varies. This helps you choose the right mortgage package based on your financial situation and goals.
The Canadian system offers two types of mortgages:
a. Conventional Mortgage
With a conventional mortgage, you need a down payment of at least 20% of the property's price. While this larger upfront payment might be difficult, it offers several advantages:
No mortgage insurance required, saving you thousands in premiums.
Lower monthly payments than insured mortgages.
More equity in your home from the start.
Often, lenders offer better interest rates.
More flexible refinancing options.
Your monthly payment will depend on your mortgage amount, interest rate, and amortization period (typically 25-30 years). Because you're putting more money down initially, lenders view conventional mortgages as lower risk.
b. Default Insured Mortgage
A default insured mortgage (or high-ratio mortgage) allows you to buy a home with a 5% down payment. This type of mortgage is mandatory when your down payment is less than 20%.
The default insured mortgage means the bank will insure their risk. The default insurer creates a package to pay off the bank if you’re about to lose your property due to a mortgage default, so the bank doesn’t lose money.
Down payment requirements:
5% for homes priced at $500,000 or less.
5% on the first $500,000, plus 10% on the portion above $500,000.
Currently, properties valued at $1 million or more aren’t eligible for insured mortgages. This changes on December 15th, 2024 — the insured mortgage cap will increase to $1.5 million.
The insurance:
Mortgage default insurance protects the lender if you can't make your payments.
Canada Mortgage and Housing Corporation (CMHC), Sagen, or Canada Guaranty provides it.
The insurance premium, depending on your down payment size, ranges from 2.8% to 4% of your mortgage amount.
You can add the premium to your mortgage and pay it over time.
Key considerations:
A smaller down payment helps you enter the housing market sooner, but you'll pay more long-term due to insurance premiums.
The insurance premium is non-refundable, even if you pay off your mortgage early.
Your monthly payments will be higher than conventional mortgages due to the larger loan amount and insurance costs.
2. A default insured mortgage sounds great because it lets you make a down payment of less than 20%, but watch out
Coughing up just 5% of your property’s cost as a down payment seems like a tempting offer. It temporarily frees up money for other things. In the long run, it’s expensive because of the default insurance cost.
If you choose the 5% minimum down payment, you’d have a 95% loan-to-value ratio. This limits your future home equity access for renovations, buying a new property, or getting lower credit.
So even if you decide to go for a default insured mortgage, try to make an initial payment of over 5%.
3. When saving for your down payment, factor in all costs.
For a $500k home, save at least 5%, or $25k, plus miscellaneous costs like legal fees, closing costs, and moving costs.
Miscellaneous costs vary by institution; some require 1.1-2% of your home’s cost, aside from the 5% down payment. Starter homes cost $400k-$600k.
4. For immigrants looking to make their first purchase, condos are a great option.
Condos get a bad reputation due to their maintenance fees, but they’re great starter homes, especially for immigrants.
They offer convenience since the maintenance fees cover certain housekeeping tasks, making them easier to manage than expansive detached or semi-detached houses with a yard and all.
5. Choose something affordable and don’t be afraid to start small
Choose something affordable and manageable, regardless of the house type.
Don’t hesitate to start small; you can always move to a bigger house later. Dipo Salvador says, “Your first home shouldn’t necessarily be your forever home.”
When Dipo first moved to Canada and bought his first home, he could only afford a $250k condo. He bought the first affordable option to enter the market. Today, he owns multiple homes.
6. Choose your first home based on your goals
Your priorities for your first home should guide your property choice. If you want to build wealth through real estate, your first home needs to be an equity builder.
It doesn’t need to be shiny or fancy. It can be something that needs work to glam it up. It’s fine if it’s at the lower price range.
Take Kristen Davis’s case, a realtor and real estate investor. Though Canadian, she spent much of her adult life abroad before returning. She had no financial records or credit score history and had to build it from scratch like most immigrants.
In 2020, she bought her first home in Canada for about $200k in Halifax. It wasn’t pretty, but she fixed it up. Today, it’s worth about $450k and offers an expansion opportunity that could allow her to rake in $108k in annual rent.
The investor route may not be for you. If you’re interested in snapping up your dream from the jump, go for it. Not everyone wants to be a real estate investor, and that’s totally okay.
7. Be sure to consider practical factors
When scouting for a home, consider:
The area and amenities.
How far is the place from your workplace?
And available schools, if you have or plan to have kids.
8. Consult your financial advisor to understand your financial situation
When planning to buy a house, consulting your financial advisor is a must. This will help you know how much you have and can afford. Not doing this can lead to disappointment.
Speaking with a mortgage broker helps you assess your financial readiness and what to do if you’re not. You might need to pay off debts to achieve the right debt ratio to afford your desired house and conclude on a suitable price point.
9. Your pre-approval is your friend
To get a mortgage, you need a pre-approval. A pre-approval is a document indicating how much loan you qualify for based on your financial situation.
Here's the process:
Your financial advisor, mortgage broker, or specialist collects key information from you, including:
Employment history and income
Current loans and debts
Available down payment
Credit score
Other financial assets
They input this information into their lending system.
The system calculates your maximum mortgage amount.
You receive a pre-approval letter that includes:
The maximum borrowable amount
The interest rate they'll hold for you (usually 90-120 days)
Conditions for final approval.
The process factors in your Gross Debt Service (GDS) ratio and your Total Debt Service (TDS) ratio. GDS includes all home costs (mortgage, property tax, condo fee, heating, etc).
Lenders usually consider 32% of your income. For the TDS, your other liabilities like car, lines of credit, and recurring payments are assessed. Lenders look at 40% to 42%, varying with their risk tolerance.
Note:
There’s something called a stress test. If a lender gives you a 4% interest rate, the stress test adds 2%, so the bank will qualify you at 6%. This means your 32% GDS and 40% TDS would be calculated at 6%. The stress test creates a margin for a potential income drop from unexpected situations like job loss.
10. Start building your credit score early
As an immigrant, it isn’t easy to transition from an instant cash payment culture to a credit-based culture. But it’s necessary to build your credit score, which is key to getting a good mortgage deal.
Your credit score indicates how likely you are to repay borrowed money on time, based on your borrowing history and habits from credit bureaus (Equifax and TransUnion in Canada).
A good credit score signals to lenders that you’re a reliable borrower, and a check is conducted during your pre-approval.
Building this score offers benefits like higher approval chances, lower interest rates, and better deals. For example, if you’ve just arrived in Canada, obviously without a credit score, and walk into the bank for a conventional mortgage with a 20% down payment, the bank will likely give you a loan at a 6% interest rate.
The bank would offer a lower interest rate of 5.5% to a borrower with good credit and a 20% down payment. This is why, as an immigrant in Canada, one of your first priorities after arrival is building your credit score.
Here are two tips for building your credit score:
a. Open an account with a top five bank
People often opt for online banking for the absence of fees, but leading banks offer better credit. There are credit programs that issue a credit card immediately for new immigrants to start building their credit score.
b. Set up small loans
If you can afford to buy a car with cash, provide a down payment, and use credit for the rest, phone bills count. The government is looking to allow your rent to count as credit, which should help with building credit scores.
11. Cash or mortgage? It depends
For those with cash to cover the full property cost, deciding whether to pay outright or take out a mortgage depends on your goals. Both choices have upsides.
Everybody dreams of buying a home in cash. It means no debt servicing and you can pull out equity if you need money. However, if you’re looking at real estate as an investment, it wouldn’t make sense to tie down your cash in one home, when you can put down 20% for multiple homes.
With $1 million, you can buy 4-5 homes: one for yourself and the others for rental income. You can use that income to pay off their mortgages. Your net worth would be higher than with one million-dollar home.
You’d build equity in multiple homes that you can access anytime. If one appreciates significantly, you could sell it and pay off all your mortgages.
12. Renting is a viable option
Buying a home offers advantages like equity access and favorable tax implications. However, renting first isn’t a terrible decision.
While renting, you can save for a bigger home down payment. This saves on mortgage insurance costs and positions you to build equity in your home.
13. You can get creative with your purchase plan
You can buy a multi-unit house and rent out sections. This is called rent hacking and college students do it a lot. The rental income could cover your mortgage while building equity.
Several people can pool resources to buy a home, with everyone’s names on the deed. Up to five people can do this.
14. Is there a perfect time to buy a house? Not really
Timing the perfect market to buy is tough. “As realtors, we always say the perfect time to buy is now,” says Kristen. The time to buy is when it’s right for you – when you’re not rushed, and you have the money.
“When you need a home, buy a home. Whenever you get into the market, what matters is how much your mortgage is,” Dipo adds.
That said, there are market-based factors to consider. For instance, are you in a seller’s market, with fewer properties than buyers, or a buyer’s market, with many properties and fewer buyers, creating less competition or a balanced market?
15. Beware of the extra income trap when buying additional property
If you want to invest in real estate, plan your finances. Don’t fall into the extra income trap of relying on rental income to pay your mortgage.
Ensure your income can cover the mortgage payments if your renter defaults for months.
16. Which is better to buy, new buildings or old houses?
It depends on your preferences and goals.
Pro tip: if you want your forever home, buy a brand new one. If you want to build equity, invest, and have multiple homes, buy something you can build sweat equity in and start creating your empire.
Here’s what that looks like. Kristen bought a house for $400k, renovated it, and it appraised for $780k in a year and a half. Depending on the area, a new building may not appreciate that much in a year.
You can only invest limited sweat equity; you just have to wait for its market value to appreciate. If you want to create equity through your work, buy and improve something less new. If that’s your preference, follow the BRRRR mantra: Buy, Rehab, Rent, Refinance, Repeat.
17. As a low-income earner, you can dream of a home
Anyone can get a home based on what you can afford as determined by your lender. There’s no harm in starting small and getting something for the right price in a decent location.
You don’t want to buy a home that would stretch your finances to ridiculous lengths.
Other tips for low-income earners working towards their first home include setting a goal and reducing expenses to save for a down payment.
18. Beware of variable interest rates
A variable interest rate fluctuates over time, typically based on a benchmark rate set by the Bank of Canada. This means your monthly payments can change as interest rates rise or fall.
On the other hand, a fixed interest rate remains unchanged throughout your mortgage term, so you'll know exactly how much you'll pay each month.
During periods of low-interest rates, like during the pandemic, variable interest rates can seem attractive. They allow you to borrow more or pay less upfront. However, these rates are not fixed. As interest rates rise, so will your monthly mortgage payments.
This can be problematic if you haven't factored in potential rate increases into your budget. If you're not prepared for higher payments, you could risk defaulting on your mortgage, leading to serious financial consequences.
Variable rates can be suitable for short-term mortgages or rental properties, but they're generally riskier than fixed-rate mortgages. If you're unsure which option is right for you, consult a financial advisor.
19. Have a plan, your existing funds will be scrutinized
If you’re financing your property purchase with money from your home country, you must explain the source. Some banks require it to be in Canada for the last three or six months.
These requirements are usually connected to top banks offering better rates and terms. For instance, top banks don’t recognize money from thrift (esusu/ajo) as yours. They’ll add it to your liability which drops your affordability.
20. Several initiatives are currently in place to make buying homes in Canada easier
To address the worsening housing crisis, the Canadian government has implemented several initiatives, including:
a. The creation of the Prohibition on the Purchase of Residential Property by Non-Canadians Act
In 2023, the Canadian government banned foreign ownership of residential properties to increase housing availability for Canadian citizens, permanent residents, and certain temporary residents.
This ban aims to curb foreign investment in Canadian residential real estate, identified as a factor in rising housing prices. The government hopes to make housing more affordable for Canadians by limiting foreign ownership.
b. Introduction of the Home Buyers’ Plan
The Canadian government launched the Home Buyers' Plan (HBP) allowing first-time homebuyers to withdraw up to $60,000 from their Registered Retirement Savings Plan (RRSP) for a home down payment.
Before the Home Buyers' Plan (HBP), individuals couldn't withdraw funds from their RRSPs to buy a home without immediate tax implications. The HBP changed this by allowing first-time homebuyers to withdraw a portion of their RRSP funds tax-free, boosting their down payment savings.
Note: The withdrawn funds must be repaid to the RRSP over 15 years, with annual minimum repayments.
c. Introduction of the First Home Savings Account (FHSA)
The First Home Savings Account (FHSA) is a new registered plan introduced in 2023 help first-time home buyers save for a down payment.
The FHSA allows tax-deductible contributions like an RRSP, unlike traditional savings accounts. However, withdrawals for a qualifying home are tax-free, like a Tax-Free Savings Account (TFSA). You can invest contributions made to your FHSA, and like withdrawals, returns on investments aren’t taxed.
The FHSA is a powerful tool for saving for a down payment because of these benefits. Dipo explains, “The First Home Savings Account is a must for anyone in Canada looking to buy a home.”
The FHSA offers a great opportunity to grow your savings with an annual contribution limit of $8,000 and a lifetime limit of $40,000. The tax-free withdrawal feature lets you put more money towards your home purchase.
