How to navigate your first home purchase

There are few financial decisions you’ll ever make that are as impactful—and potentially stressful—as your first home purchase. It’s an experience that blends the excitement of becoming a homeowner with the apprehension of borrowing sums of money that could take decades to pay back.

With the stakes so high, it’s important to approach a first home purchase with careful planning and a good understanding of up-front costs, insurance, and affordability concerns.

Figuring out what you can afford

Several factors will determine your choice of home, a key one being how much you can afford to pay. Lenders in Canada tend to use two debt service ratios to assess home affordability: the gross debt service ratio (GDSR) and the total debt service ratio (TDSR).

• Gross debt service ratio—The GDSR compares your gross monthly income to your total monthly home ownership costs, including mortgage payments, property taxes, heating costs, and 50% of condo fees, if applicable. These costs should add up to less than 32% of your gross monthly income.
• Total debt service ratio—The TDSR expands on the GDSR by factoring in all other monthly debt payments (e.g., credit card payments, car loans) to your gross monthly income. This should add up to less than 40% of your gross monthly income.

These ratios are key to determining the size of mortgage you may qualify for. But it’s also important to analyze your expenses and lifestyle goals to determine a monthly payment that fits your overall budget.

Up-front and closing costs

Getting a mortgage approval will give you a sense of the long-term costs of buying your home, but there are several one-time costs and outlays that also need to be considered.

• The down payment—This is typically the largest up-front cost. The minimum down payment in Canada is 5% for homes priced up to $500,000. For homes priced between $500,000 and $1,500,000, the minimum is 5% on the first $500,000 and 10% on the remaining amount. Homes priced above $1,500,000 require a 20% down payment.
• The deposit—The deposit is paid when you sign the purchase agreement on the property, which means you need to have these funds available when you make an offer. It can range from 1% to 5% of the total price and is often at the high end of that range in more competitive real estate markets. The deposit counts toward your down payment but is typically nonrefundable, so you’ll likely lose it if you back out of the purchase agreement before it closes.
• Land transfer tax—This is paid by the buyer when the purchase closes. Typically, it ranges from 0.5% to 2% of the purchase price of the home, but it varies greatly by province and municipality. The percentage also goes up with the purchase price.
• Legal fees—It’s necessary to engage a lawyer to complete the home purchase.
• Other costs—You may want to pay for a home inspection before signing the purchase agreement. Depending on the condition of the home, you may also have up-front costs for renovations and repairs, replacing appliances, or painting.
• HST/GST—You’ll usually only pay these taxes on a brand-new home or condominium. This can either be paid at the closing of the deal or by adding it to the mortgage.

Insuring your home (and your mortgage)

Given the financial commitment of a mortgage, there are various insurance products available to protect you if you or your partner were to pass away. You also may need to insure your mortgage to protect the lender, depending on the size of your down payment.

• Mortgage loan insurance—This protects your lender in the event that you default on your mortgage. In Canada, you must take out default insurance if your down payment is less than 20%, but it’s generally not available on homes priced above $1,500,000. Typically, the insurance cost is added to the mortgage and is paid down over the life of the loan.
• Mortgage protection insurance—This insurance pays off your mortgage in the event of unforeseen events, including death. The cost is usually added to your monthly mortgage payments.
• Term life insurance—This provides a lump-sum benefit to your beneficiaries in the event of your death. That money can be used any way they wish: to pay off the mortgage, cover debts, pay living expenses, and replace lost salary.

Leverage government programs

Canadians have access to several government programs designed to help first-time buyers save for a house.

• The First Home Savings Account (FHSA)—The FHSA is a registered account that allows for tax-free savings for a first home purchase. It allows for both tax-deductible contributions and tax-free withdrawals. You can contribute up to $8,000 per year, up to a lifetime maximum of $40,000.
• Home Buyers’ Plan (HBP)—This program allows first-time home buyers to withdraw up to $60,000 from their RRSP tax free for a qualifying home purchase. If there’s more than one person purchasing the home, and both qualify as first-time buyers, each person can withdraw up to $60,000. These funds must be repaid over a 15-year period starting in the second calendar year after the HBP withdrawal. 
• Home buyers’ amount—You may be eligible to receive a federal nonrefundable tax credit worth up to $1,500 on the purchase of a qualifying home. Some provinces may also offer a provincial tax credit.
• GST/HST new housing rebate—The GST/HST new housing rebate allows an individual to recover some of the GST or the federal part of the HST paid for a new or substantially renovated house as long as it’s to be used as their primary place of residence. 
• Land transfer tax rebate—Some provinces or cities provide a rebate to offset the cost of land transfer taxes. 

Develop a plan to achieve your goal

Once you understand the costs, set a clear savings target. Calculate the total amount you need for the down payment and closing costs and establish a timeline for when you’d like to buy your home. Break down this amount into monthly savings targets to make it more manageable.

Consider investing the funds in a way that aligns with your time horizon.

How a Manulife Wealth advisor can help

Saving to buy your first home in Canada requires careful planning, discipline, and—sometimes—a bit of sacrifice.

Your Manulife Wealth advisor can help you understand the costs, set a savings target, and establish a timeline for when you’d like to buy your home.

With a good grasp of the costs involved, some clear goals, and good advice, first-time homebuyers can maximize their financial resources and successfully break into the Canadian housing market.