Never bought a home? You might think the first step to buying a home is checking out places. But it's important to take some steps to prepare before you're deep into house-hunting and going to open houses every weekend.
Read on for first-time homebuyer tips to make sure that you're ready to seize the moment when you spot the perfect place, avoid common mistakes, and have a smooth closing process.
The first step in the home buying process should be to ramp up your savings. Remember, the bigger your down payment, the less you’ll have to borrow.
By saving a good nest egg, you’ll be better prepared for the expenses that come along with purchasing a new home — from legal fees, closing costs (which is about 2-3% of the purchase price) and moving expenses to routine upkeep.
You can begin building a down payment by creating a budget and deciding how much you can save each month. (Be sure to check out Scotiabank's Money Finder Calculator.) You'll see that even $100 per month can quickly grow into a sizable amount over time.
Also consider other options, like rounding up your purchases and putting aside your change each time you buy something. A banking program like Scotiabank's Bank the Rest® savings program,* for example, automatically helps put money into your savings account every time you use your debit card to make purchases.
You can also put any windfalls you might receive into your down payment savings, such as tax refunds, inheritances, or bonuses.
As an added bonus, if you have at least a 20% down payment, you won't have to pay mortgage default insurance premiums.
The Government of Canada requires mortgage default insurance when homebuyers have less than the 20% down payment typically needed to qualify for a conventional mortgage.
You may also want to explore other sources for a down payment like the Home Buyers' Plan, a first time homebuyer program created by the federal government that allows first-time homebuyers to withdraw funds from their Registered Retirement Savings Plan (RRSP) to put towards the down payment on their first home.
The amount that first-time home buyers can withdraw tax-free from their RRSP from is $35,000. First-time home buyers purchasing a home jointly with a spouse or partner can each withdraw up to $35,000 from their own RRSP under the Home Buyers' Plan, for a total down payment of $70,000.
In 2023, Canada launched a new way to save for a first home. The First Home Savings Account (FHSA) is a registered plan that allows you to make up to $8,000 in tax-deductible contributions annually up to a total contribution of $40,000. That means that a couple saving for a down payment could contribute as much as $80,000 to grow tax free in the account.
While not limited to first-time homebuyers, you can also save money for a down payment in your Tax-Free Savings Account (TFSA). With a TFSA, your money grows tax-free in the account and you can take it out at any time.
A TFSA is a great place to put savings for short- and medium-term financial goals like buying a home. Your contribution room begins to accrue when you turn 18 or become a resident of Canada, and any unused contribution room rolls over to the next year. Depending on your age, you might be able to save a considerable amount in your TFSA.
Lenders (like your bank) typically calculate your ability to afford a mortgage based on traditional debt-to-income principles relating to your monthly housing costs, your gross monthly income and all of your other debt obligations, including loans, credit cards, and lease payments.
You can get a good sense of the mortgage loan you could qualify for by trying out online mortgage tools, such as Scotiabank's What Can I Afford? calculator.
It's also important to understand Canadian mortgage rules around things like the mortgage stress test and your debt-to-income ratio. A great way to figure out how much you're eligible for is to speak to a Scotiabank Home Financing Advisor.
Once you've set your savings plan and determined how much home you can afford, getting a mortgage pre-approval is the next step. This is important because if the perfect home comes along, you may need to act quickly, especially in a competitive housing market.
With a pre-approved mortgage, sellers know that you're creditworthy, which can help you make a compelling offer.
Getting pre-approved for a mortgage is an easy process. All you need to do is bring your personal and income information to your lender. You can meet with a mortgage advisor, there will be a credit application and then you will be able to learn how much you're pre-approved for and what your mortgage rate would likely be. You can even get pre-approved online from the comfort of your home with Scotiabank eHOME.+ A pre-approval will help you look at homes with a purchase price in your affordability range.
Buying a home can be a complicated process! Here are the top three most common first-time homebuyer mistakes to look out for:
- Not saving enough: The cost of a down payment is just the start of the expenses involved in buying a home. There are also closing costs (2-3% of your purchase price), moving costs, transfer taxes, PST or HST if it's a new home, taxes, repairs, and more. There are also ongoing expenses (like property taxes, maintenance fees, utilities and garbage disposal and home insurance). Make sure you are budgeting for expenses you know will come up as well as have a cushion in the form of an emergency fund in case an unexpected expense comes up in your home purchase process.
- Not doing a home inspection: In a tight market, you might be tempted to make an offer without having a home inspection. But that could mean you are signing up for a home with expensive problems. Make sure the place you're buying is structurally sound and in good shape. You don't want to find out the home has been 50% eaten by termites after you move in just because you were worried that waiting for a home inspector could interfere with your deal.
- Buying at the top of your budget: Some homebuyers think they should spend the full amount that they're preapproved for. But not everyone can afford that. Make sure you look closely at your budget to gauge the affordability of potential properties to make sure that you'll be able to pay your mortgage every month while still having money left over to enjoy things like a dinner out. The last thing you want to be is house poor.
You've made an offer on your dream home, it's been accepted, your mortgage was approved, and you're about to close. Now what? There are a bunch of things you'll need to work on after closing:
- Cover all closing costs: There's more than just the home price to cover when buying a home. As part of closing, you'll be required to pay for things like land transfer fees, PST or HST, real estate agent commissions, lawyers fees, record filing fees, homeowners association (HOA) fees, property taxes, renovations and more.
- Get home insurance: Part of homeownership is taking care of your investment. Make sure to choose a homeowners' insurance policy that will cover you in case a disaster strikes — like your basement floods or a tree falls on your roof.
- Change the locks: The house is yours, but you don't know who the last homeowners gave a copy of the keys to. Changing your locks is a good idea to help protect your place.
- Change your address: That's right! Now that you're a homeowner, it's time to change your address on all your personal identity documents like your driver's license.
Now that you know all the tips and tricks to buying your first home, you're ready to start searching. But what should you do about choosing a mortgage? And what type of mortgage is best for first-time home buyers? There isn't one type of mortgage that works for all first-time home buyers — what matters is what's best for your needs.
The good news is that mortgages are fairly simple to understand. The key things for new borrowers to understand is the difference between fixed and variable rate mortgages, your mortgage term, amortization period, and the frequency of your payments. Compare different options with Scotiabank Mortgage Calculator.
- Fixed vs. variable: There are two main types of mortgages. A fixed rate mortgage is where the interest rate you pay remains the same throughout the mortgage term. With a Scotiabank variable rate mortgage, your interest rate is based on the Scotiabank prime rate, which is based on the Bank of Canada rate. If the Scotiabank prime rate changes, your payment could increase or decrease depending on the change. Generally, a fixed rate mortgage is best in economic climates when interest rates are expected to go up. In contrast, a variable rate is often best in economic climates when interest rates are expected to go down. Not sure whether to go with a fixed or variable rate mortgage? Get the Scotia Total Equity® Plan (STEP) that lets you split your STEP into multiple mortgage and line of credit components.1 This can be a useful strategy to manage interest rate risk (and allows you to have both types of mortgages – fixed and variable).
- Mortgage term: In Canada, mortgage terms tend to range between one and five years. This is the amount of time a bank or lender extends you a mortgage for. After your mortgage term is done, you can renew your mortgage or get another mortgage. You can also refinance your mortgage at any point in your mortgage term.
- Closed and open mortgages: A closed mortgage agreement doesn’t provide options for payout before the maturity date. A lender may allow early payout of a closed mortgage under certain circumstances but will charge a prepayment charge for doing so. An open mortgage provides you the flexibility for prepayment or a full payout at any time.
- Amortization period: This refers to the life of your loan or the period of time you would need to pay your mortgage back. Amortization periods in Canada can go up to 30 years. The loan amount you need to pay back during that time will then be amortized or divided into mortgage payments over that period of time.
- Payment frequency: While most people think mortgage payments are something you always pay monthly, you can actually pay your mortgage more frequently than that. Paying your mortgage biweekly or weekly instead of monthly helps you pay down your mortgage faster and reduce the interest you’ll pay over the life of the mortgage.
The bottom line
Feel ready to buy a home? By following these tips, you can make better choices, avoid mistakes, and make sure that your buying process goes smoothly — from start to finish.
And now that you have all the info you need, your next step is to dive into the fun part – the home searching process. With a mortgage pre-approval in hand and a clear idea of your budget, you'll be able to focus on homes in your exact price range. That means you'll be less likely to fall in love with a home that will be too big of a stretch. We hope you find your dream home. We're here to help when you do!
*Some conditions might apply.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.