December 2023
For many Canadians, buying a home is a major life goal and financial milestone. However, entering the real estate market for the first time can be daunting. Proper preparation is essential to ensure your first home purchase goes smoothly and sets you up for future financial success.
The Canadian Housing Market
Canada’s real estate market has seen substantial price appreciation over the past few years. Since February 2020, home prices across all regions of the country have risen by at least 20%. This is largely driven by heightened demand from immigration, remote work trends, and lack of housing supply.
While the recent rise in interest rates has somewhat cooled the demand for housing, we are still experiencing elevated home prices, coupled with financing that has become more expensive. Weakening home affordability highlights the need for careful and intentional financial planning.
The First Step
The home buying process starts with preparing your finances and determining your budget and the amount available for your down payment. Work with a financial planner to see how much you can afford. Then begin your property search and make an offer when you find the right home.
Professionals like real estate agents and mortgage brokers can provide guidance through every stage, but having your finances in order from the start will make things much easier.
Saving for the Down Payment
The minimum down payment depends on the purchase price. It is 5% for the portion under $500,000, 10% on the portion up to $1 million, and 20% for the remaining portion over $1 million.
Down payments can come from RRSPs when using the Home Buyer’s Plan (HBP), First Home Savings Accounts (FHSAs), TFSAs or regular savings. It is important to note that the funds should be in low-risk investments when preparing for an upcoming real estate purchase.
Additional Costs Beyond the Down Payment
Aside from the down payment, other upfront costs include land transfer taxes, legal fees, and mortgage insurance if the down payment is under 20%. Ongoing costs involve property taxes, maintenance, utilities and mortgage interest. You should list all the ongoing cost that will add to your mortgage payments and plan for them before making an offer.
Getting Pre-Approved for a Mortgage
Lenders assess borrowing capacity using two ratios.
- Gross Debt Service (GDS) Ratio: GDS is the percentage of your monthly household income that covers your housing costs. It must not exceed 39%.
- Total Debt Service (TDS) Ratio: TDS is the percentage of your monthly household income that covers your housing costs and any other debts. It must not exceed 44%.
To get your pre-approved mortgage, you can either contact banks directly or a mortgage broker. If you are a first-time homebuyer, a mortgage broker can be a better and easier avenue to get the best interest rate available to you.
Set Realistic Expectations
First-time buyers often have to compromise on their dream home. Focus your search based on what you can truly afford, not a wish list of features. Starter homes still offer a chance to build equity for future moves.
Financial planners, accountants, real estate agents, mortgage brokers and other professionals can provide invaluable advice for first-time homebuyers. Do not hesitate to contact Pembroke’s experts. We will be happy to answer your questions and to point you in the right direction.
With proper preparation, you can make your first home purchase in Canada a smooth and financially sound experience. Saving for the down payment, understanding your budget and setting realistic expectations are key to this major milestone.
For more information, watch the webinar Fiona Tan and Philippe Ryan-Giroux held on this topic on August 22, 2023.
Disclaimer
These suggestions do not constitute personalized financial planning, and it is recommended to seek advice from an expert should you want to optimize your financial situation. The methods outlined here are only meant as a broad discussion.
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Disclaimer
This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.
