First Time Homebuyer
As a First Time Homebuyer, there are many things to consider when it comes to home financing; from the downpayment to the stress test it can all be overwhelming if you do not understand the process. Here are some things to consider when looking to finance your new home:
Downpayment
Canadian Mortgage Home Insurance Corporation (CMHC)
Stress Test
Annual Percentage Ratio (APR)
Pre-Approval
Rebates
It is imperative for a first-time homebuyer to understand the purpose of a downpayment before engaging in a mortgage transaction. When purchasing a property, the value of it will determine how much is needed to be put towards mortgage insurance. Here are a couple of examples:
Property 1:
Value = $500,000
Since the property's value is $500,000, the borrower is only required to apply a downpayment of 5% towards mortgage insurance. Therefore:
500,000 * 5% = $25,000
Property 2:
Value = $650,000
Since the property's value is above $500,000, the borrower will be required to apply a down payment of 5% on the first $500,000 then another 10% on the remaining portion of $150,000. Therefore:
500,000 * 5% = $25,000
150,000 * 10% = $15,000
Total downpayment required = $40,000
A homebuyer must be aware that mortgage insurance is required if their downpayment is below the 20% threshold for an uninsured mortgage. The amount required for mortgage insurance is based on the property's value:
A minimum of 5% downpayment is required on properties valued at $500,000.00 or less.
A minimum of 5% downpayment on the first $500,000.00, and 10% downpayment on the remaining portion. *Please see "Property 2" in the Downpayment section for more detail.
If the property's value is $1,500,000.00 or more, then mortgage loan insurance is not available
Traditional financing comes with the requirement of meeting a stress test to ensure that borrowers will be able to maintain their mortgage payments in the event of a rate increase. This is done by lenders to protect their interest in the loan and to avoid the risk of a potential default.
A stress test is conducted by applying an additional 2% to the mortgage rate that the borrower may be approved for. For example, a borrower approved at a rate of 4.65% will be required to prove that they can manage the mortgage payments if the rates were 6.65%.
The Annual Percentage Ratio is the amount that will determine the cost of borrowing. This fee is applied by the lender on closing the mortgage loan and the amount generally varies from lender to lender, and product to product.
Example, if a borrower is seeking a mortgage loan of $650,000.00 and the APR is 4.71%, then the borrower will need to be aware that at the closing of the deal, the lender will deduct $30,615 from the loan amount.
As a first time homebuyer, a pre-approval is a fantastic product to help understand how much a lender may be willing to approve on a mortgage loan. This product is based on factors such as credit, income, expenses, loan amount, and property value.
It is important to note that a pre-approval is not a guarantee of how much the lender will be willing to approve a borrower for. If there are any changes to the factors listed above, then the lender may adjust their terms.
First time homebuyers are eligible to receive certain benefits upon CRA approval once they have made their purchase. Below are the benefits available and brief description of them:
First Time Homebuyer GST Rebate: A first time homebuyer may be eligible to receive 5% of the property's purchase price on a recently developed home that is valued up to $1 million. This rebate can be claimed alongside the GST/HST rebate program.
GST/HST Rebate: Homes purchased from a builder, are newly constructed, or have received substantial renovations on, or after March 20, 2025; but before 2031
Home Buyers Plan program: Allows a homebuyer to withdraw up to $60,000.00 from their RRSPs to purchase or build a home for themselves or a specified disabled person.
First Home Savings Account: A tax-free savings account which allows a first time homebuyer to save for the purpose of purchasing a home.