Understanding Canadian Mortgages: A Newcomer’s Guide to Home Buying

Buying your first home in Canada is a major milestone, but the mortgage process can seem overwhelming for newcomers. This comprehensive guide breaks down everything you need to know about Canadian mortgages, from basic concepts to advanced strategies.

Canadian Mortgage Basics

What is a Mortgage?

A mortgage is a loan specifically used to purchase real estate. The property itself serves as collateral for the loan. In Canada, mortgages are highly regulated and have specific rules that differ from many other countries.

Key Terms You Need to Know

• Principal: The amount you borrow
• Interest: The cost of borrowing money
• Amortization: Total time to pay off the mortgage (typically 25-30 years)
• Term: Length of your mortgage contract (typically 1-5 years)
• Down Payment: Initial payment toward the property

Down Payment Requirements

Minimum Down Payments

• Less than $500,000: 5% minimum
• $500,000 to $999,999: 5% on first $500,000, 10% on remainder
• $1 million or more: 20% minimum

For Newcomers

Many lenders offer special programs:

• Some accept 5% down for newcomers
• Others require 10-35% depending on status
• International students often need 20% minimum

Sources for Down Payment

• Personal savings
• Gift from immediate family
• RRSP (Home Buyers’ Plan)
• Sale of assets
• NOT borrowed money (in most cases)

Mortgage Insurance

When It’s Required

• Down payment less than 20%
• Protects the lender, not you
• Added to your mortgage amount

Insurance Providers

• CMHC (Canada Mortgage and Housing Corporation)
• Sagen (formerly Genworth)
• Canada Guaranty

Insurance Premiums

• 5-9.99% down: 4.00% of mortgage
• 10-14.99% down: 3.10% of mortgage
• 15-19.99% down: 2.80% of mortgage
• 20%+ down: No insurance required

Types of Mortgages

Fixed-Rate Mortgage

• Interest rate stays the same
• Predictable payments
• Protection from rate increases
• Higher initial rates

Variable-Rate Mortgage

• Rate fluctuates with Bank of Canada
• Can change monthly
• Usually lower initial rate
• Risk of payment increases

Open vs. Closed

• Open: Can pay off anytime without penalty
• Closed: Penalties for early payment
• Most mortgages are closed
• Open mortgages have higher rates

Qualifying for a Mortgage

The Stress Test

All borrowers must qualify at the higher of:

• Contract rate + 2%
• Bank of Canada qualifying rate (currently 5.25%)

Income Requirements

• Steady employment preferred
• Usually need 3 months of Canadian employment
• Self-employed need 2 years of tax returns
• Some lenders accept foreign income

Credit Score Requirements

• Minimum 680 for best rates
• 650-679 may qualify with conditions
• Below 650 is challenging
• Newcomers can use alternative documentation

Debt Ratios

Gross Debt Service (GDS) Ratio:

• Housing costs ÷ Gross income
• Maximum 32-39%

Total Debt Service (TDS) Ratio:

• All debt payments ÷ Gross income
• Maximum 40-44%

Newcomer Mortgage Programs

Major Banks Offering Newcomer Programs

1. RBC Newcomer Mortgage

   • No Canadian credit history required
   • Minimum 5 years amortization
   • Up to 95% financing

2. TD Newcomer Program

   • For those in Canada less than 5 years
   • Flexible down payment options
   • International credit history considered

3. Scotiabank StartRight

   • No Canadian employment history required
   • Foreign income considered
   • Down payment flexibility

4. CIBC Foreign Worker Program

   • For temporary and permanent residents
   • Minimum 10% down
   • No Canadian credit required

Required Documentation

• Passport and immigration documents
• Work permit or PR card
• Employment letter
• Pay stubs (if available)
• Bank statements
• Proof of down payment
• International credit report (if applicable)

The Home Buying Process

1. Get Pre-Approved

• Know your budget
• Lock in rate (usually 90-120 days)
• Shows sellers you’re serious
• Free and no obligation

2. Find a Real Estate Agent

• Buyer’s agent is free (paid by seller)
• Find someone who understands newcomer needs
• Get references from community

3. Search for Homes

• Consider commute times
• Research neighborhoods
• Check school districts
• Consider future resale value

4. Make an Offer

• Usually conditional on:
  • Financing approval
  • Home inspection
  • Review of condo documents (if applicable)

5. Finalize Mortgage

• Submit all documents
• Appraisal ordered by lender
• Final approval issued
• Sign mortgage documents

6. Close the Deal

• Lawyer handles transfer
• Pay closing costs
• Receive keys on closing date

Additional Costs to Consider

One-Time Costs

• Land Transfer Tax: Varies by province (0.5-3%)
• Legal Fees: $1,000-$2,500
• Home Inspection: $400-$800
• Appraisal: $300-$500
• Title Insurance: $250-$400
• Moving Costs: Variable

Ongoing Costs

• Property Tax: 0.5-2% of home value annually
• Home Insurance: $1,000-$3,000/year
• Utilities: $200-$400/month
• Maintenance: 1-3% of home value annually
• Condo Fees: $200-$1,000/month (if applicable)

First-Time Home Buyer Benefits

Federal Programs

• First-Time Home Buyer Incentive: 5-10% shared equity
• Home Buyers’ Plan: Withdraw up to $35,000 from RRSP
• First-Time Home Buyers’ Tax Credit: $1,500 credit

Provincial Programs

• Vary by province
• Land transfer tax rebates
• Down payment assistance
• Property tax credits

Tips for Newcomers

Build Your Profile

1. Establish Canadian employment
2. Build credit history quickly
3. Save aggressively for down payment
4. Get pre-approved early

Common Mistakes to Avoid

• Not getting pre-approved first
• Ignoring additional costs
• Buying more than you can afford
• Not getting home inspection
• Forgetting about property taxes
• Making major purchases before closing

Negotiation Tips

• Research comparable sales
• Don’t fall in love with one property
• Be prepared to walk away
• Consider off-peak seasons
• Look for motivated sellers

Alternative Options

If You Can’t Qualify Yet

• Rent while building credit
• Save larger down payment
• Find a co-signer
• Consider rent-to-own
• Look at less expensive areas
• Buy with family/friends

Conclusion

Getting your first mortgage in Canada as a newcomer is absolutely achievable with proper preparation. Focus on:

• Building your credit score
• Saving for down payment and closing costs
• Understanding all costs involved
• Getting pre-approved before shopping
• Working with newcomer-friendly lenders

Remember, homeownership is a long-term commitment. Take your time, do your research, and don’t rush into the biggest financial decision of your life. With patience and preparation, you’ll find the right home and mortgage for your situation.