How to finance your first home purchase
This piece was originally drafted by MD Financial Management and featured on md.ca.
Buying a home can be both exciting and complex. It’s one of life’s biggest decisions and one of your biggest financial responsibilities. Having the right information can save you from frustration, disappointment and costly mistakes.
Key considerations when choosing your mortgage
Selecting the right mortgage can be as difficult as selecting the perfect house, so it’s important to take the time to really understand your mortgage needs. With so many options available, the process can be overwhelming and time-consuming.
- Interest rates, fees and mortgage features are often negotiable.
- Amortization is the period over which the entire loan is repaid. The amortization you choose (15, 20, 25 or 30 years) will have a significant impact on how much interest you will pay over the life of your mortgage.
- The term of the mortgage is the length of time over which certain factors are fixed, such as the interest rate. Terms can range from three months to 10+ years.
- Accelerating your mortgage payments will reduce the amount owing, thereby reducing the amortization period and the amount of interest you pay (e.g., make biweekly payments rather than monthly payments).
- Fixed-rate mortgages give you the stability of knowing what your payments will be for the full term of your mortgage. Variable-rate mortgages, where the interest rate you pay can go up or down, require a certain risk tolerance but can create potential interest savings.
- Unsure of what you can afford? Try the handy Mortgage Calculator on our website to help you determine the best mortgage for you.
How do lenders determine how much I can afford?
Lenders use two main guidelines to determine how much mortgage you would qualify for.
Your gross debt-service ratio should be less than 32%.
Housing costs (i.e., mortgage, property taxes, heating expenses, 50% of condo fees if applicable)
Gross monthly income
Your total debt-service ratio should be less than 40%.
Housing costs (i.e., mortgage, property taxes, heating expenses, 50% of condo fees if applicable) + Other debt
Gross monthly income
The mortgage stress test, imposed by the federal government, is another way of making sure borrowers will still be able to service their loan if interest rates climb higher.
The stress test requires that borrowers must be able to pay off a mortgage using an interest rate that is the greater of:
- the Bank of Canada’s five-year benchmark rate; or
- their negotiated rate + 2%.
There are three exceptions, where the stress test is not applied.
- Mortgage renewal: If you renew your mortgage with your existing financial institution/lender, the stress test rules won’t apply.
- Existing mortgage applications: If you’ve received approval for a mortgage already, the new rules won’t affect your mortgage, regardless of when it closes.
- Credit unions: The rules apply only to federally regulated financial institutions, not credit unions. Certain credit unions may choose to apply the same stress test, so be sure to find out before you apply.
How much down payment do I need?
You must have a down payment of at least 5% for the first $500,000 of the home purchase price and 10% for the portion of the price above $500,000 (for properties up to $1 million). Note that a down payment of less than 20% will require mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada.
The typical cost for this insurance ranges from 2.8% to 4.0% of the amount of your mortgage, and this amount can be added to your mortgage. As such, if you are able to make a down payment of at least 20%, you will save a considerable amount in insurance and interest charges.
How long do I have to pay off my mortgage?
Currently, the maximum amortization period for a CMHC- or Genworth-insured mortgage is 25 years, or 30 years if you don’t require mortgage loan insurance. Naturally, the sooner you pay off your mortgage, the less interest you’ll pay.
Can I use money from my RRSP for my down payment?
Yes. Since 1992, first-time homebuyers have been able to withdraw money from their RRSP through the Home Buyers’ Plan without paying tax. You and your spouse can each withdraw up to $25,000 from your RRSPs. Generally, this amount must be repaid over 15 years and the repayment cannot be claimed as a deduction on your tax return. You can also use funds from your tax-free savings account (TFSA) for your down payment, and in future years you can recontribute as much, or as little, of those funds as you wish to your TFSA.
I’ve heard that upfront and one-time costs of buying a home can be significant. What are these costs?
Aside from your down payment, the largest single upfront expenditure will likely be your closing costs, which include things like moving costs, legal fees and land transfer fees (typically 1.5% to 4% of the purchase price of your home; rates, terms and calculations vary by province, territory and municipality).
There is also a mortgage loan insurance premium of up to 4% of the mortgage amount if your down payment is less than 20%. Home inspection fees can vary widely, but $300 to $500 is typical. Your lender may require an up-to-date survey, and a survey fee can run from $1,000 to $2,000. Appraisal fees are typically covered by the lender.
What can my MD Advisor help me with?
Your MD Advisor* can help you determine how a mortgage will fit into your financial plan. Can you handle adding debt on top of what you already owe? Do you need to prepare a will? Do you have insurance in place that will cover the repayment of your mortgage if you become ill or disabled, or in the event of your death?
Through our relationship with Scotiabank and its mortgage professionals, you’ll be able to access a mortgage solution that fits your life and complements your overall financial plan.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. For a detailed list of these companies, visit md.ca.