The 5 steps listed below outline the steps required to purchase property in Canada.
Step 1. Is homeownership right for you?
Great, you have finally decided to buy a home. This could be the biggest financial and emotional decision you will ever have to make. The first thing you want to do is list the pros/cons between renting and owning.
Jotting this down on a piece of paper will help make the decision easier. Keep in mind that there are no right or wrong answers.
Here are some questions to consider before moving forward:
Are you financially stable?
- Do you have the appropriate financial management skills?
- Have you considered the full costs of owning a home including repairs, maintenance, and mortgage payments?
After answering these questions and more, you will have a better understanding if you want to proceed to step 2. This is a big step for most people so make sure you are ready for it.
Step 2. Are you financially ready?
The first thing you want to do is determine how much are you currently spending on a monthly basis. These can be broken down into two specific groups: household expenses and debt payments.
Household expenses include everything that is costing you to run your house currently. This will give you a better idea of owning a home is feasible or not. Some of these expenses include mortgage (principal and interest), condo fees (if applicable), property taxes, heating, electricity, water, and maintenance and repairs.
Taking a close look at these payments are very important. This amount may fluctuate depending on the size of the house and how many people are currently residing in the house. The bigger the house, the more expenses it will have. For example, it will take a lot more heat to heat up a larger area than a smaller area.
Debt payments expenses
This is very important to calculate considering when you apply for a mortgage, the mortgage advisor will ask you this question. To look into this, you will need to determine how much debt you are currently carrying.
Some of these monthly debt payments can include loans from a property you own, car loans and leases, personal loans or lines of credit, credit cards, student loans, and any other types of loans (even from department stores). Once you calculate the average of them all, you will need to total them together for a total monthly expense.
Total monthly expenses
Once you added up both your household expenses and your debt payments, you will need to total them up together. This will help you determine your total monthly expenses and give you a better idea of what you can afford.
Planning ahead is very important because you want to know exactly how much you can afford and what the budget is once you start looking for a home.
There are two rules to consider:
Affordability Rule 1
Principal, Interest, Taxes and Heating (PITH) is the common rule that states that your monthly housing costs should not be more than 32% of your gross monthly income.
Affordability Rule 2
Your debt load should not be more than 40% of your gross monthly income. This includes your PITH (Principal, Interest, Taxes, and Heating), plus all your other expenses such as car loans and leases, personal loans and line of credit etc).
Maximum House Price
One of the hardest things to save up for is the initial down payment needed to purchase a home. Other factors that you want to take under consideration is your household gross monthly income and your mortgage interest rate.
Calculating the house price depends on the maximum mortgage amount you can borrow, monthly mortgage payments and how much you can actually afford. Keep in mind that the interest is fixed or variable for the term of the mortgage and can be renegotiated at the end of the term. The interest is also compounded on a semi-annual basis.
The minimum down payment will depend on how much the house is worth and most of these calculations made are estimates and don’t consider sales tax and other fees required.
It is important to obtain a credit report after you done all your calculations listed above. This will help you determine if lenders will want to give you money or not. This credit report determines how much debt you have owned and repaid. If you have a history of missing too many payments, it can put you at risk of not getting approved.
There are two main credit reporting agencies in Canada. The first one is TransUnion of Canada and the other agency is Equifax Canada Inc. Both of them can provide you with a credit report between $0 – $25.
After you have the credit report, look at it carefully to determine if it is accurate. If you find information that is not accurate, contact the agency to get it corrected. This might take some time so the sooner you do it, the better you are off.
No credit history
It is important to start building a credit history in Canada if you haven’t done so. The easiest way to building credit is by getting a credit card with a low-interest rate and paying it off on time. By making purchases on the credit card and paying them off once you received the bill it will help you establish good credit.
Bad credit history
If you had poor or bad credit, you might not get approved by a lender and not be able to own property in Canada. You will need to re-establish your credit history in order to continue. Bankruptcy drops off your record after seven years.
Once a lender is willing to lend you money, there are different types of mortgages to choose from: interest rate type, amortization period, payment schedule. Make sure to bring the following before you meet up with the lender: proof of source of income, source and amount of down payment/deposit, proof of financial assets, information on all bank accounts/loans/debts, all sources of income, details on the job and all the person identification and information needed.
Interest rate type
There are two types fo interest rates, “fixed” or “variable/protected.”
Fixed rates will not change for the duration of the mortgage term. These tend to have a higher interest rate but allow you to know how much you owe in interest each year.
Variable rates fluctuate with the rate of the market. There are no predictions of how much you will be paying and will be constantly changing. If the rates go down, you end up paying off your mortgage quicker or the opposite. This depends on your risk tolerance level.
This refers to the length that you choose to pay off the mortgage. The typical amount is 25 year amortization periods but can be as short as 15 years. The shorter periods would mean a higher mortgage payment than longer periods. Lump sum payments can be added to reduce the amortization periods.
This refers to when you will be making your mortgage payments: weekly, bi-weekly, bi-monthly and monthly payments. You also have a choice to do accelerated bi-weekly payments over bi-weekly regular payments allowing you to pay off your mortgage quicker and save money.
There are many fees associated with buying a home. Here are other fees that you might not have considered.
Mortgage loan insurance premium
Unless you pay more than 20% down on a deposit for your mortgage, you will need to have mortgage loan insured. This is because you will have a high-ratio mortgage and the lender needs to have some sort of protection. This premium is added onto your mortgage payments or paid at the time of closing.
Mortgage broker fee
If you choose to go with a mortgage broker, they will charge you a fee but will try to find the best rates and terms suited to your needs.
Home inspection fee
It is recommended that you get a home inspector before you purchase a home. This means putting a condition on your home when you are buying the home to ensure there is nothing wrong with the home. The cost of this depends on the complexity of the home, age, and size.
Certificate or Survey of location cost
The cost of a survey can range from $1,000 to $2,000 and has to be done if the house hasn’t had one done in the last 5 years. If the homeowner doesn’t want to pay for one, you may have to pay for one. This needs to be coordinated with your realtor because you cannot just hire a surveyor to go onto his property to do work.
This cost can range between $250 – $350 depending on the recognized appraisal. This might be done by request by the mortgage lender or for other reasons. It is important to know how much the property is actually worth before you bid on it.
Some of the things that an appraisal will tell you:
- Assessment of current market conditions affecting property value
- Assessment of properties functional and physical characteristics
- Analysis of comparable sales in the area or for similar house type
The lowest down deposit is 5% but that would require the mortgage loan premium insurance. Typically, you would want to be putting 20% down on a conventional mortgage.
A deposit is made when you are serious about the home purchase, it shows intent to buy. This deposit will go towards your closing price. It is important to be serious about the purchase because if you back out for any reason (ie. no mortgage approval, home inspection didn’t come back good), the deposit may not be refundable and can be sued for damages.
This helps you cover loss caused by defects of title to the property.
Land registration fee
The cost of this is determined by the percentage of property’s price. These costs can be in the thousands and must be paid to municipal or provincial at the close of the sale.
Making sure the water is drinkable and the supply is adequate is important. These costs should be discussed with the realtor.
This should be checked out by a professional if you are buying a home with a septic tank. These costs should be discussed with the realtor.
Estoppel certificate fee
An upfront cost of up to $100 will be charged if you are living in a condominium or strata unit (does not apply to Quebec).
Prepaid property tax/utility bills
Property taxes are charged by the city and based on the home’s value. If the seller has paid for a portion of these fees, they will be passed onto you. These will be needed to be paid back to the seller.
This has to be bought because it covers replacing your home and contents if loss. This insurance must be bought before closing day. This depends on what the lender wants and if they require it.
Property Transfer Tax
When you purchase a home it is your responsibility to pay the property transfer tax which includes taxable transactions for: crown grant, life estate, foreclosure, transfer of fee simple, right to purchase or agreement for sale, lease or lease modification agreements, etc.
The minimum cost of these legal fees would be $500 (not including applicable taxes). These are fees that must be paid in the closing day in addition to the lawyer or notary costs to check the legal status of the property.
Here are some other questions you want to ask yourself before looking at purchase a home.
Moving expense: Have you considered the cost of packing and unboxing of all your items? Have you considered hiring a professional or doing it yourself?
Service connections: Have you considered your cable, telephone, and Internet bill? Other services can include security and home monitoring. Some services may ask for a deposit when you sign up.
Renovations: Is the house move in ready or do you need to tweak things before it is usable? For instance, if the toilet is leaking, it will probably need to be fixed right away. Some repairs and renovations can be done at a later date.
Condominium/Strata fees: Are there monthly fees attached to your home?
Appliances: Are appliances in good working conditions or do they need to be replaced?
Gardening/snow-cleaning: Do you have the correct equipment for different seasons of the year or do you need to go out and purchase them?
Dehumidifier: Would you need one to control moisture levels?
Hand tools: Do you have basic tools to fix up cabinets screws or for small repairs?
Decoration materials: Do you want to re-decorate when you move in? Change the paint color of the walls or apply new wallpaper?
Windows: Does the house come with blinds and curtains?
Step 3. Which home is right for you?
After you have taken a good look at your finances, the next step would be to see what kind of house you want. There are many options on the market so let’s figure out what home you might like.
Here are some questions you want to ask yourself:
- How many bathrooms do you need?
- How many bedrooms do you need?
- Do you need space for a home office?
- How many cars do you own and what kind of parking facilities do you need?
- Do you plan on having children?
- Do you plan on opening a business or working from home?
- Do you have people moving out? (ie. teenagers)
- Do you want a home that you can retire in?
- Do you have older relatives that might be coming to visit?
- Are you close to retirement?
- Do you want extra storage?
- How many fireplaces do you want?
- Do you want a pool or hot tub in the backyard?
- Do you want air conditioning?
- Do you have a family member with special needs?
After you figure out the basics, it is important to determine what kind of location you want to live in. Your budget can play an influence in this decisions.
Do you want to live in the countryside, in a town or city? Keep in mind that you want to make travel to and from work as close as possible and see if you are near shopping outlets/schools (if you have children).
The next thing you want to do is decide if you want to build a new home, renovate an existing house or move into a ready to live in house. Building a house might be a little difficult if you have little to no knowledge of houses. Buying a new home comes with advantages such as warranties, up to date appliances and newer style amenities.
Let’s go ahead and assume that you are either going to buy a house that needs to be renovated or a new house. There are various types of houses you can buy on the market.
Single-family detached: The unit stands alone and is detached with one dwelling unit. It sits on its own lot and gives a family a degree of privacy.
Single-family Semi-detached: These are homes that are attached to another home and offer benefits of the single-family detached but at a lower cost.
Apartment: A unit in a building consisting of rooms and includes a bathroom and kitchen.
Duplex: A house that contains two single family homes. They can be side by side or in front of each other. Each of the homes has a separate entrance.
Manufactured home: Factory-built single family home.
Modular home: A factory-built home that is split up into two or more modules before being transported to and then reassembled.
Stacked townhouse: Two-storey homes that are stacked on top of each other. Attached in groups of four or more.
Step 4. Home buying process
After you have figured out the type of home you want to buy, now the search begins for the ideal or perfect home. There are many ways to search for homes.
By using the langley.com website you can search for properties. This would be the easiest way to start your search for your home.
Another way is by calling a realtor and telling them all the research you have done in steps 2 – 3 and they can pull up listings based on that. Working closely with a realtor is important because they are experts in the field. They bring knowledge to the home buying process and can refer you to people that do services such as mortgage specialists, appraisers, etc.
After you have found a house that you would like to purchase, an Offer to Purchase would need to be drafted. The realtor with the help of a lawyer/notary can help prepare this. Some of the information on this offer to purchase will include:
Name: Legal name of the parties included including legal civic address of the property
Price: Price you are offering to purchase the property
Things included: Anything that is included in the property including appliances, etc.
Amount of deposit: Amount paid to the realtor
The closing day: When you take possession of the house. Typically this is 60 days after the other party has accepted the offer but sometimes it can be longer or shorter.
Date the offer expires: This is important to have because it gives the contract a specific date it will become null and void.
Other conditions: These include inspection reports, property appraisals, mortgage approval, etc.
What happens after the Offer to Purchase letter
After the realtor drafts up this Offer to Purchase paperwork, it is important to check it over with a lawyer because it is a legal document. This is important because once it is provided to the vendor, you cannot take it back.
You can expect three responses:
Response 1: Vendor accepts your offer and move onto the next buying process.
Response 2: The vendor makes a counter-offer usually lower than the asking price but higher than your offer. You can either accept the counter-offer or counter the vendors offer-letter.
Response 3: The vendor makes you another counter-offer and negotiations begin. Do not get in the heat of the moment and keep bidding but rather keep an open mind. You need to figure out what you can afford before going over your budget. If the sale doesn’t go through the deposit is returned at this stage.
After the Offer to Purchase letter has been accepted, the next step would be to see a mortgage lender. When you arrive, they will ask you for all the financial records that you have obtained in step 2 and all the paperwork from step 3. Make sure you follow the guide above to get a better idea of what the mortgage lenders will be asking you for.
After, the lender will ask you what kind of mortgage you would like to apply for: a conventional mortgage, high-ratio mortgage, and different types of terms. The terms of the mortgage include: fixed or variable mortgage, adjustable mortgage, closed or open mortgage.
All of this needs to be figured out before the closing day. A mortgage lender will go through all the appropriate measures to make sure you can fulfill the sale.
Closing Day/Possession Date
This is the date that you legally take possession of the house and you finally get to call it your home! The finally signing usually happens at lawyers or notary office.
Here are the some of the things that happen on a closing day.
- Your lender will give money to the lawyer/notary.
- You must give the down payment to the lawyer/notary (minus the deposit)
This is because the lawyer/notary will be giving the money to the vendor and will register the title in your name. They are also in possession of the keys to the home that they will give you after all the necessary paperwork is done.
Moving day/pre-closing costs
Reminder those questions you asked earlier on about movers and packing/unpacking your items? Good thing you thought about this earlier and will make it easy to determine what you want to do.
Another thing to do once you move into the property is change all the locks. You do not know how many keys have been lost over the years or who has the keys to the house. This is very important for your safety.
The next thing you want to do is some cleaning and decorating. These costs can add up due to cleaning supplies costing a lot and set some time aside to do this.
Step 5. Property in Canada responsibilities
After you bought your home it is now your financial responsibility. The first thing you want to do is make sure you make your mortgage payments on time. This is very important because delinquency many result in extra charges and can impact your credit rating. If the payments are not made, it can result in serious consequences such as foreclosure.
Plan for the cost of operating a home which includes maintenance and repair costs. Some of these costs were already listed in the expenses but might include gardening and snow removal, security, and condominium or strata fees. Figure out if these costs are on a monthly basis, annually or are a one-time purchase.
Saving up for emergencies is also important. You never know what will go wrong with the house and that needs to be fixed immediately. The rule of thumb is to keep 5% of your take home earnings in a special account as a safety net.
Since you own your own house, it is important to live within your means. Depending on you financial status, it will be hard to manage money but managing your money is now very important. It is important to have priorities and your house should be one of them.
Home safety is very important and making sure you have a fire evacuation plan is important. Do you specify a route in case of a fire? Have you thought about all the doors and windows that could be possible exit routes?
Along with a fire evacuation plan, it is important to keep a fire extinguishers on each floor if you have a two-storey house. Don’t forget to replace them if they are 10 years or older.
Smoke and carbon monoxide detectors should be placed on each floor. Smoke alarms should already be placed in various positions of your house due to building codes. It is important to buy a carbon monoxide detector cause your house might not have it. This will protect you from illness and even death.
Make sure you keep important papers at the bank or in a safe due to a fire or if they were to get stolen. It is also important to keep emergency numbers posted close to phones.
These steps were adapted from Canada Mortage and Housing Corporation (CMHC).