Some of the biggest milestones in your life might include graduating, starting your first career, getting married, having kids, and, of course, buying your first home.
Buying your first home has become a sort of rite of passage for many young people. However, it can also seem like a daunting task with a lot of unknowns.
In this blog, we will break down the costs of buying your home and uncover the sometimes hidden expenses that you might not think about throughout the buying process.
We’ll use an example of first-time homebuyers John and Lisa, who purchased a home for $800,000, to illustrate what costs they should expect when buying the home.
Costs to Consider When Buying a Home in Canada
Buying a home in Canada is a significant financial commitment that goes beyond just the purchase price. As you prepare a first home savings account, you will likely want to start planning for the fees and expenses that come with purchasing a home. Having a home-buying budget is essential to being prepared for the expenses that are to come.
To help you navigate the home-buying process, here’s a detailed breakdown of the various costs you should consider:
The Home’s Purchase Price
The purchase price is the most obvious and substantial cost. It’s the amount you agree to pay the seller for the property, which is determined through negotiation of the asking prices and the current market value and conditions. Whether you’re dealing with a real estate market that has high housing prices or a market that is seeing lower prices, it’s important to budget for this amount, as it sets the stage for all other related expenses.
Your Down Payment Amount
The down payment is a percentage of the home’s purchase price that you pay upfront. In Canada, the minimum down payment varies based on the price of the property:
- For homes costing up to $500,000: The minimum down payment is 5% of the purchase price.
- For homes costing between $500,000 and $1,500,000: The minimum down payment is 5% on the first $500,000 and 10% on the portion above $500,000.
- For homes costing over $1,500,000: The minimum down payment is 20% of the purchase price.
The larger your down payment, the less you need to borrow, which can reduce your monthly mortgage payments and the total interest paid over the life of the loan.
In our example, John and Lisa purchased their first house for $800,000 and made a 10% down payment of $80,000.
Recent Changes to Down Payment Requirements in Canada
Changes to required down payment percentages were announced by the Government of Canada on September 16, 2024, and set to take effect on December 15, 2024.
Previously, homes with a purchase price over $1 million required a minimum down payment of 20%.
Now, homes with purchase prices over $1.5 million are required to have a minimum down payment of 20%.
This means that homes between $1 million and $1.5 million now qualify for a minimum down payment of 5% on the first $500,000 and 10% on the portion above $500,000.
This increase in the insured mortgage cap may help first-time homebuyers afford a home with a higher purchase price, helping to secure a home in expensive markets.
Mortgage Loan Insurance
If your down payment is less than 20% of the purchase price, you’ll need mortgage loan insurance. This is commonly provided by the Canada Mortgage and Housing Corporation (CMHC) or other private insurers.
This insurance protects the lender in case you default on the loan. The cost of this insurance varies depending on your down payment amount and the size of your mortgage but generally ranges from 0.6% to 4.5% of the loan amount. This premium can often be added to your mortgage balance.
To continue our example, because John and Lisa only put down 10% of their purchase price, they will need to pay mortgage default insurance, which can be calculated with CMHC and comes out to just over $22,000 added to the total amount that will be paid off over the amortization period. This brings the couple’s total cost to roughly $742,000 ($800K – $80K + $22K).
Recent Changes to Mortgage Amortization for Insured Mortgages
Prior to changes announced by the Government of Canada on September 16, 2024, the maximum mortgage amortization for insured Canadian mortgages was 25 years.
Now, under the new conditions, first-time homebuyers and buyers of newly built homes will be given the option of a 30-year amortization period for insured mortgages.
Extending the mortgage length by an additional 5 years means lower monthly payments, as the cost of the home is spread over more time.
With lower monthly payments, first-time homebuyers may find it easier to qualify for a mortgage, as their projected monthly expenses will be lower.
Mortgage lenders assess whether applicants can afford their payments, and lower costs may help first-time buyers meet the strict criteria more easily.
To use our example, John and Lisa could consider extending their mortgage’s amortization period from 25 to 30 years. By doing so, their monthly payment will decrease by around 8%, from $4,200 to approximately $3,860.
Although lower monthly payments can potentially help first-time homebuyers get a mortgage approval, extending the length of your mortgage is not without risks. To determine what’s best for your situation, talk with your mortgage professional.
Your Interest Rate
The interest rate on your mortgage significantly impacts your monthly payments and the total cost of your loan. Mortgage rates can be either fixed or variable:
- Fixed-rate mortgages have the same interest rate throughout the term of the loan, providing stability in your payments.
- Variable-rate mortgages have an interest rate that can change over time based on market conditions, which can lead to fluctuations in your payments.
Interest rates are influenced by the Bank of Canada’s policies, economic conditions, and your creditworthiness. In the past several years, we have seen higher interest rates which will influence your monthly mortgage payment. However, following three consecutive interest rate reductions by the Bank of Canada this year, there is hope that these rates will continue to decrease.
It’s wise to compare rates from more than one mortgage lender or mortgage broker to secure the best possible deal.
Utilities
Utilities are ongoing costs you’ll need to budget for once you own the home. These typically include:
- Electricity: Charges for the use of electrical power.
- Water and Sewer: Costs for water usage and wastewater treatment.
- Gas: If your home uses natural gas for heating or cooking.
Utilities can vary based on the size of the home, its energy efficiency, and your personal usage patterns.
Land Transfer Taxes + Other Expenses
When purchasing a home, you’ll pay a municipal land transfer tax, which is a percentage of the property’s purchase price. The rate and structure of this tax vary by province:
- Ontario, British Columbia, and Quebec have progressive tax rates, where the percentage increases with the property’s value.
- Other provinces may have a flat rate or different brackets.
In addition to land transfer tax, you’ll be responsible for annual property taxes. These taxes fund municipal services like schools, roads, and emergency services.
If you purchased a condo or apartment, you will have to consider building or condo fees that support the safety and maintenance of the community.
The amount of property tax you pay is assessed based on the value of your home and can vary widely depending on the location and municipality.
For John and Lisa, they have a land transfer tax that comes out to $12,475. However, because they are a first-time buyer, they qualify for a credit on this tax that reduces this amount by $4,000. Credits and opportunities like these are often available for first-time buyers and can help you save money.
Other Move-In Expenses
Besides the down payment and taxes, there are other closing costs that come with home ownership:
- Legal Fees: Hiring a lawyer or notary to handle the legal documents and legal aspects of the purchase, such as title searches and registration.
- Home Inspection: An inspection to identify any potential issues with the property before you finalize the purchase.
- Title Insurance: Protects against any issues with the property’s title that might arise after purchase.
- Moving Expenses: The costs of moving your belongings to the new home. This could include renting a truck, hiring professional movers, or the gas to get your items from point A to point B.
These costs can vary, so it’s a good idea to set aside funds to cover these expenses, avoiding any surprises.
First-Time Homebuyers’ Cost Summary
To demonstrate what first-time homebuyers can expect during the buying process, we’ve been using the example of John and Lisa.
Let’s look at a quick summary of their buying costs that we’ve covered in this post:
Purchase Expenses
- Home purchase price: $800,000
- Minus down payment: $80,000 (10% of purchase price)
- Mortgage insurance: $22,000
Total mortgage amount: $742,000 ($800k – $80k + $22k)
The total mortgage amount will be spread over monthly payments, equalling approximately $3,860 to 4,200 per month, depending on if John and Lisa select a 25- or 30-year insured mortgage.
Other Expenses
John and Lisa will also pay some other expenses in addition to their mortgage:
- Land transfer tax: $8,475 ($12,475 – $4k first-time buyer credit)
- Other expenses vary on a case-by-case basis, including legal fees, a home inspection, title insurance, and moving expenses.
Overall, John and Lisa will pay additional costs beyond just the original purchase price of their first home.
Some of these costs can be blended into their monthly mortgage payments, whereas others will be paid upfront, like their down payment.
In total, John and Lisa will pay approximately $830,000+ for the purchase and mortgage of their first home.
Buying With Voortman Realty
Buying a home in Canada involves several financial considerations and monthly expenses beyond the purchase price.
By understanding these costs—ranging from your down payment and mortgage insurance to ongoing utility bills and miscellaneous closing costs—you can better prepare for this significant investment and ensure a smoother home-buying experience.
Working with professionals – like a financial advisor, mortgage lender, home inspector, and real estate agent – can help you manage and plan for these costs, especially if you are a first-time buyer.
That’s where Voortman Realty can help! Our team of expert real estate agents are eager to help first-time home buyers start their house-hunting journey.
Ready to get started? Contact us today to see how we can help you find your first home!