Owning a home is a dream for many Canadians. It symbolizes stability and a personal milestone. But for those buying a home for the first time, the process can feel a bit overwhelming. Knowing the basics helps make the journey smoother, especially when determining if you qualify as a first-time homebuyer.
What is a First Time Home Buyer?
In Canada, a first-time homebuyer is typically someone who hasn’t owned a home in the past four years, including both the buyer and their spouse or common-law partner if purchasing together. Who qualifies as a first-time home buyer? Generally, it’s anyone who meets the four-year rule, meaning neither you nor your partner have owned and lived in a home during that period. However, there are exceptions—such as if you’ve separated from your spouse and no longer co-own a home, you might still qualify. Special cases, like having a disability, may also allow for different rules. Be sure to check the specific program requirements to confirm eligibility.
To qualify as a first-time homebuyer in Canada, you must meet the following criteria: you cannot have previously owned a property in Canada or abroad.
However, there are exceptions. It is possible to qualify as a first-time homebuyer again after owning a home under the following circumstances:
• If you have separated from and no longer live with a spouse or partner.
• If you purchased your first home more than four years ago, you may be able to make use of government programs to buy for a second time.
It’s important to note that the above criteria may vary depending on the program you want to access as a first-time homebuyer. For example, some programs may have additional eligibility requirements or different definitions of what qualifies as a first-time homebuyer.
For instance, the Home Buyers’ Plan (HBP) defines a first-time homebuyer as: “You are considered a first-time homebuyer if, in the four-year period, you did not occupy a home that you owned or one that your current spouse or common-law partner owned.”
As well, the rules surrounding opening a First Home Savings Account (FHSA) state: “You will be considered to be a first-time homebuyer if you did not, at any time in the current calendar year before the account is opened or at any time in the preceding four calendar years, live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that either: you owned or jointly owned or your spouse or common-law partner (at the time the account is opened) owned or jointly owned.”
In addition to programs designed to make it easier to come up with a down payment, there are also provincial incentives designed to help with land transfer taxes. These, too, will have their own definition of what qualifies as a first-time homebuyer. In Ontario, for example, the eligibility requirements for the Land Transfer Tax Refund for First-Time Homebuyers are more stringent.
“The purchaser cannot have ever owned an eligible home, or an interest in an eligible home, anywhere in the world, at any time.” In addition, “If the purchaser has a spouse, the spouse cannot have owned an eligible home, or had any ownership interest in an eligible home, anywhere in the world, while he or she was the purchaser’s spouse. If this is the case, no refund is available to either spouse.”
Home Financing Guide for First-Time Homebuyers
Down Payments
A down payment is the upfront portion of the home’s price that you pay at closing. How much down payment does a first-time homebuyer pay? It depends on the home’s price. For homes under $500,000, a first-time homebuyer in Canada would need to put down at least 5 per cent. For homes priced higher than that, you’ll need 10 per cent for the portion above $500,000. Homes priced at $1,000,000 or more require a 20 per cent down payment. While making a larger down payment reduces the amount you need to borrow and lowers your monthly mortgage payments, many first-time home buyers start with smaller down payments to get into the market. If your down payment is less than 20 per cent, you’ll also need to get Canada Mortgage and Housing Corporation (CMHC) insurance, which protects the lender in case you default on your loan. Keep this in mind when figuring out how much a down payment for a first-time homebuyer is needed.
Look into a first-time homebuyer savings account. The First Home Savings Account (FHSA) is a tax-free way to save up to $40,000 toward your first home. Contributions to the FHSA are tax-deductible, and any withdrawals made from a first-time homebuyer savings account for purchasing a home are also tax-free; this helps you build up your down payment more easily.
Mortgage Types and Rates
When you’re getting a mortgage, you’ll come across two main types: fixed-rate and variable-rate. A fixed-rate mortgage locks in your interest rate for the entire term, so your payments stay the same every month, making it easier to budget. A variable-rate mortgage changes with the market, meaning your payments could go up or down depending on interest rates. While variable rates can give you lower payments at first, they carry the risk of rising over time. Which one is best for you depends on your financial situation and how comfortable you are with changes in payments. Many first-time home buyers in Canada prefer fixed-rate mortgages for the stability they offer, especially when they’re new to homeownership.
Closing Costs
Besides the down payment, a first-time homebuyer should be ready for closing costs, which usually range from 1.5 per cent to four per cent of the home’s price. These include legal fees, title insurance, appraisal fees, and home inspection costs. You may also have to pay land transfer taxes, depending on your province. Some provinces offer rebates, so be sure to check what’s available in your area. Closing costs can add up, so it’s important to budget for them in advance to avoid any surprises.
Credit Score and Financial Health
Your credit score plays a crucial role when applying for a mortgage, especially for a Canada first time home buyer. A strong credit score can help you secure better interest rates and terms, saving you money over time. Check your score early and fix any issues before applying for a mortgage. Common fixes include paying down credit card balances, ensuring timely bill payments, and disputing any errors on your credit report. Typically, a good credit score in Canada is between 660 and 900. A Canada first-time homebuyer with a solid credit score in this range may also qualify for additional benefits and better financing options.
Mortgage Term Length and Amortization
Another key decision for a first-time homebuyer in Canada is how long the mortgage term should be. Mortgage terms typically range from three to five years, after which you’ll need to renew, usually at a different interest rate, which could be higher or lower than your current interest rate. Mortgages are also amortized over lengthy periods, up to 30 years. A shorter amortization period means higher monthly payments, but less interest paid over time, while a longer amortization period offers lower monthly payments but more interest in the long run. It’s important to find the right balance based on your financial situation and goals.
Debt-to-Income Ratio
Lenders look at your debt-to-income ratio (DTI) to decide if you can afford a mortgage. This compares your monthly debt payments to your gross income. Keeping this ratio low by paying off debt before applying for a mortgage can help you qualify for a bigger loan or better interest rates. For a first-time homebuyer in Canada, this is especially important if you have existing debt like student loans or car payments.
Future Property Value and Resale Potential
Even if you’re not thinking about selling anytime soon, you should consider the resale value of your home. Things like location, nearby schools, and amenities can affect the value over time. Choosing a home in a desirable area can be a good investment, and thinking about the future resale potential is a wise move, even for a first-time home buyer.
First-Time Homebuyer Incentive Programs in Canada
Buying your first home can be daunting; however, there are incentives for first-time homebuyers to make purchasing a home easier.
1. First Home Savings Account (FHSA): This program allows eligible individuals to save up to $5,000 per year tax-free to purchase their first home. Contributions to the account are not tax-deductible, but the interest earned on the account is tax-free.
2. Home Buyers’ Plan (HBP): This federal program allows first-time homebuyers to withdraw up to $60,000 from their Registered Retirement Savings Plan (RRSP) to use toward a down payment. The money must be repaid to the RRSP within 15 years.
3. Land Transfer Tax Rebate: In many provinces, first-time homebuyers can receive a rebate on the land transfer tax they pay when purchasing a home. The rebate amount varies by province, from part of the tax to all of it.
4. First-Time Home Buyers’ Tax Credit (HBTC): The calculation amount for the Home Buyers’ Tax Credit (HBTC) is $10,000, resulting in a maximum tax credit of $1,500 for eligible homebuyers.
5. GST/HST Housing Rebates: The sales of new homes are generally subject to GST/HST, and these tax rebates help to offset some of the tax you paid on your home. This particular rebate is not limited to first-time homebuyers.
Remember that these programs’ eligibility criteria, maximum purchase rates, and other specifics can differ depending on the region or territory. It’s wise to investigate the programs that are accessible in your location to determine whether you are eligible and how you can benefit from them.
Note that The First Time Homebuyer Incentive (FTHBI), a shared-equity mortgage program with the Canadian government, has been discontinued. The Canada Mortgage and Housing Corporation (CMHC) announced that no new applications will be accepted after March 31, 2024.
How RE/MAX Agents Help First-Time Homebuyers
RE/MAX agents in Canada are licensed professionals who can guide first-time homebuyers. Here’s how a RE/MAX agent may assist you throughout your home-buying journey:
• Initial Consultation: Meet with you to discuss your needs and preferences in a home, as well as your budget, timeline, and financing options.
• Home Search: help you search for properties that meet your criteria using the Multiple Listing Service (MLS) and other resources. They may also suggest neighborhoods, schools, and other important amenities that fit your buying profile.
• Property Viewing: arrange property viewings and accompany you to each property, highlighting beneficial features and potential issues.
• Offer Preparation: assist with preparing and submitting the proposal, including negotiation with the seller.
• Closing: help you navigate the closing process, which may include finalizing financing, arranging for a home inspection, and completing paperwork.
Work with a RE/MAX agent to get clarity and support throughout home-buying.
If you're navigating this dynamic market, whether buying or selling, let's talk strategy. Our team can guide you through the most efficient processes, aiming to save you time, money, and hassle. Contact us today and let's make your real estate journey a success!
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