Buying Your First Home
Homeownership is one of the biggest financial decisions of your life. Get it right by understanding Canadian mortgages, down payment rules, the stress test, true costs, and the full buying process before you start shopping.
Are You Ready to Buy?
Buying a home makes financial sense when you plan to stay at least 5–7 years. In shorter timeframes, the transaction costs (closing costs, land transfer tax) often exceed any appreciation.
Checklist
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Down Payment: How Much Do You Need?
The down payment is the cash you pay upfront. The rest becomes your mortgage. In Canada, the minimum down payment depends on the purchase price: 5% on the first $500,000, 10% on the portion between $500,000 and $999,999, and 20% for homes priced at $1 million or more.
| Down Payment | Pros | Cons |
|---|---|---|
| 5% (minimum for homes under $500K) | Lowest barrier to entry; gets you into the market sooner | CMHC mortgage insurance required; higher monthly payments; less equity |
| 10% | Lower CMHC insurance premium than 5% | Still requires CMHC insurance; meaningful savings needed |
| 20% | No CMHC insurance required; best rates; strong equity position | Takes longer to save; required for homes $1M+ |
| 20%+ | Even lower payments; more negotiating power | Opportunity cost of not investing |
CMHC mortgage insurance (also available through Sagen or Canada Guaranty) is required for down payments under 20%. The premium ranges from 2.8% to 4.0% of the mortgage amount and is typically added to your mortgage balance. On a $400,000 mortgage with 5% down, the insurance premium is about $15,200. Unlike U.S. private mortgage insurance, CMHC insurance protects the lender — not you — and cannot be cancelled early.
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How Canadian Mortgages Work
A mortgage is a loan secured by your home. If you stop making payments, the lender can foreclose and take the property. Canadian mortgages work differently from American ones: you choose a term (usually 5 years) during which your interest rate is locked in, and an amortization period (typically 25 years) over which the loan is repaid. At the end of each term, you renew your mortgage — potentially at a different rate.
Key Terms
- Fixed-Rate Mortgage
- Interest rate stays the same for the entire term (e.g., 5 years). Predictable payments, protection from rate increases. Most popular choice in Canada.
- Variable-Rate Mortgage
- Rate moves with the Bank of Canada's overnight rate. Historically lower over time, but payments can fluctuate. Good if you can handle some uncertainty and rates are expected to drop.
- Mortgage Term
- The length of your current mortgage contract — typically 1 to 5 years in Canada. At the end of each term, you renew (often with a different lender for a better rate).
- Amortization Period
- The total time to pay off the mortgage — usually 25 years (maximum 25 years for insured mortgages, up to 30 years for uninsured). Longer amortization = lower payments but more total interest.
- Principal
- The amount you actually borrowed. Your payments slowly reduce this over time.
- Mortgage Stress Test
- All buyers must qualify at the higher of their contract rate + 2% or 5.25%. This ensures you can handle rate increases when your term renews.
- Amortization Schedule
- How your payment splits between interest and principal each month. Early payments are mostly interest; it shifts toward principal over time.
Closing Costs: The Hidden Expense
Closing costs are fees paid at the end of the home buying process — typically 1.5–4% of the purchase price. On a $500,000 home, expect $7,500–$20,000 on top of your down payment.
- Land transfer tax (varies by province — Ontario charges 0.5–2.5% on a sliding scale; BC charges property transfer tax of 1–3%)
- Legal fees and disbursements ($1,500–$2,500)
- Title insurance ($300–$500)
- Home inspection ($400–$600)
- Appraisal fee ($300–$500, sometimes covered by lender)
- Property tax adjustment (reimburse seller for prepaid property taxes)
- GST/HST on new construction homes (resale homes are exempt)
- Municipal and provincial-specific taxes (e.g., Welcome Tax in Quebec, additional property transfer tax in Toronto and Vancouver)
In Canada, property taxes and home insurance are typically paid separately by the homeowner — not bundled into your mortgage payment. Some lenders may require you to set up a property tax account with them, but it's not as standard as in the U.S. Budget for these costs on top of your mortgage payment.
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The Home Buying Process Step by Step
- 1Check your credit and finances — Know your score, GDS/TDS ratios, and what you can realistically afford after the stress test.
- 2Maximize your FHSA and HBP — Start contributing to your First Home Savings Account early. Plan your RRSP withdrawals under the Home Buyers' Plan.
- 3Save for down payment + closing costs + 1–2% for moving and initial repairs.
- 4Get pre-approved from 2–3 lenders (banks, credit unions, or a mortgage broker). Compare rates and terms.
- 5Find a real estate agent — in Canada, the seller typically pays both the listing and buyer's agent commissions, so their service is generally free to you.
- 6Shop for homes — be realistic about needs vs. wants. Location and commute matter more than finishes.
- 7Make an offer — your agent will guide you. Include a financing condition and inspection condition.
- 8Get a home inspection — never waive this. A $500 inspection can reveal $40,000 in problems.
- 9Finalize your mortgage — remove conditions, lock in your rate, and submit all required documents promptly.
- 10Arrange home insurance (required before closing) and set up utilities.
- 11Final walkthrough the day before closing.
- 12Closing day: your lawyer handles the document signing and fund transfers. You get the keys!
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