How to buy your first home

An affordability guide for young Canadians

I was scrolling through Twitter recently, and saw a headline that read:

Goals! How these two millennials managed to buy a home in Toronto

And below it was this photo:

When I saw it, I snorted so loud I interrupted my partner on her Zoom call

I had forgotten what was, which made it funnier. An excerpt of the piece:

The point is, Toronto’s real estate market keeps getting less affordable.

But despite all the discussion on affordability, there isn’t a half-decent practical guide on how to afford a home.

There are a bunch of calculators out there that are put out by lenders. They are almost always focused on how big of a mortgage you can get, and not about the upfront costs and government benefits.

So I created a 101. Here’s the quick overview of contents explained further below:

Part 1 — What are the upfront costs?

  • Down payment
  • Mortgage insurance
  • PST (Provincial Sales Tax) on mortgage loan insurance
  • Land Transfer Tax (LTT)
  • Other upfront fees (appraisal, legal fees, title insurance, home inspection)

Part 2— Source of funds for upfront costs?

  • First Time Home Buyers Incentive (FTHBI)
  • Home Buyers Plan (HBP)
  • Land Transfer Tax (LTT) Rebate
  • First-Time Home Buyer Tax Credit (HBTC)
  • Your savings

Part 3— Ability to pay ongoing costs

  • Credit report
  • Gross Debt Service Ratio (GDSR)
  • Total Debt Service Ratio (TDSR)

Here’s the spreadsheet that does all the calculations:

And below is the accompanying explainer.

Upfront Costs

Down payment

Government of Canada guidelines:

  • If purchase price is less than $500,000, the minimum down payment is 5%
  • If purchase price is between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000, and 10% of any amount over $500,000
  • If purchase price is $1,000,000 or more, the minimum down payment is 20%

(source)

Mortgage insurance

Canada Mortgage Housing Corporation (CMHC) rules:

  • If the down payment is between 5%-9.99%, the insurance premium is 4.0% of the mortgage amount
  • If the down payment is between 10%-14.99%, the insurance premium is 3.1% of the mortgage amount
  • If the down payment is between 15%-19.99%, the insurance premium is 2.8% of the mortgage amount
  • If the down payment is higher than 20%, there is no insurance required

The mortgage insurance amount is added to your total mortgage amount, although you can opt to pay for it upfront.

(source)

PST (Provincial Sales Tax) on mortgage loan insurance

Only three provinces charge a provincial sales tax (PST) on the amount of your mortgage insurance — and that amount is due on closing day:

  • Manitoba: 7.0%
  • Ontario: 8.0%
  • Quebec: 9.975%

Land transfer tax (LTT)

Each province, and in some cases municipalities, have their own formula to determine the Land Transfer Tax. (Calculate here).

Other upfront fees

  • Appraisal fee: ~$300
  • Legal fees and disbursements: ~$1,500
  • Title insurance: ~$400
  • Home inspection fee: ~$500

Source of Funds

First Time Home Buyers Incentive (FTHBI)

The federal government will contribute between 5–10% of your entire purchase price, in exchange for ownership of 5–10% of the property.

You must satisfy all three rules below to be eligible:

  • Your annual (combined) income must be less than $150,000
  • Your mortgage amount may not exceed 4.5x your income
  • Your mortgage amount must be less than 20% of purchase price

(source)

Home Buyers’ Plan (HBP)

The HBP allows first-time home buyers to withdraw up to $35,000 from their RRSPs (each, if buying together) tax-free and interest-free to use towards home buying costs. This amount needs to be repaid to the RRSP accounts over a 15 year period.

(source)

LTT (Land Transfer Tax) Rebate

Each province, and in some cases municipalities, have their own formula to determine if first-time buyers get a rebate on Land Transfer Tax.

First-Time Home Buyer Tax Credit (HBTC)

This credit effectively reduces your taxes owed (or increases your tax refund) by $750.

All first-time home buyers can claim $5,000 in Line 31270 when filing income taxes. Using the non-refundable tax credit rate of 15 percent means the actual reduction of your taxes will be $750. If being shared among two joint buyers, the credit can be shared and cannot exceed $750.

Any remaining upfront costs need to be paid through your savings.

Ongoing Costs

It’s just as much your mortgage lender’s job as it is yours, to determine that you can, in fact, afford to take on a mortgage. Below are some numbers they will look at. You should too.

Credit report

General rule of thumb:

  • a credit score above 620 will make you for a mortgage loan
  • a credit score above 680 will make you eligible for the interest rates among lenders

Gross Debt Service (GDS) Ratio

  • Calculated as: Gross Debt Service (GDS) divided by monthly income
  • Gross Debt Service (GDS) = monthly mortgage payment + heating costs + property taxes + half of condo maintenance fees (if applicable)
  • The Bank of Canada 5 year posted conventional mortgage rate (found here) is used in the mortgage payment calculation as a “stress test”
  • this ratio must be above 32%

Total Debt Service (TDS) Ratio

  • Calculated as: Total Debt Service (TDS) divided by monthly income
  • Total Debt Service (TDS) = GDS from above + any other debt payments (car loan, credit card debt, another mortgage, etc.)
  • this ratio must be above 40%