Yahoo Finance Ask the Expert: What you need to know as a first-time home buyer
Canada’s housing affordability is falling further out of reach for many would-be buyers, but for those looking to buy a home in today’s market, experts say there are steps that can help you get closer to that goal.
Step one: finding a house
There is still truth to the old saying “location, location, location,” as the city you’re looking in can make a significant difference in how much money you need for a downpayment.
The Canadian Real Estate Association says the average cost of a home in Canada in September 2023 was more than $680,000. Average prices in the Vancouver and Toronto areas topped $1.2 million and $1.1 million, respectively. This could mean buying a home is out of reach for those who want to live in these cities, but home ownership doesn’t have to be a pipe dream.
“Try to buy something along the transit line so you are able to move in and out of the city, still be able to commute by public transit… and are not competing for very expensive real estate,” Dr. Murtaza Haider, professor of Data Science and Real Estate Management at Toronto Metropolitan University, said in an interview. He said this can be a great option for people who only need to work in-person a few days a week.
Those who have more flexibility in terms of work locations could consider an even bigger move, Haider says, as many already have.
“The Maritimes are an amazing place. The province of Alberta has so many opportunities. If first time home buyers can think beyond Toronto and Vancouver, there are large pockets of affordability in smaller towns,” Haider said.
The latest data from Statistics Canada show that many Canadians are on the move to more affordable provinces such as Nova Scotia and Alberta. Nova Scotia had a net population gain of nearly 3,000 in the second quarter of 2023, while Alberta recorded a net population increase of nearly 14,000. At the same time Ontario reported a net outflow of nearly 14,000 people.
However, if moving out of town isn’t an option, consider looking for a smaller living space.
“First-time home buyers, they usually have smaller household sizes," Haider says. "They can economize on shelter space by buying smaller, compact units than units bought by investors or repeat buyers."
How much do you need for a downpayment?
Once you have zeroed in on an area, prospective home buyers will need a minimum down payment of between five per cent and 20 per cent of the purchase price. Mortgage experts say there is no one-size-fits-all approach, but the bigger the down payment, the better.
“If the down payment exceeds 20 per cent then we can qualify borrowers on a 30 year [amortization] as opposed to 25 years,” Marci Deane, a mortgage broker in North Vancouver, said in an interview. She says the extra five years will make mortgage payments smaller and more manageable.
“If we have people with good incomes and a big down payment, they’re probably going to be OK,” said Deane.
Both Deane and Haider say the trend among prospective home buyers is to ask family for help, including asking for an early inheritance, teaming up with a relative to co-sign a mortgage, or two families sharing a home.
If that isn’t possible, Haider says it is important to stay in an affordable rental while you build a down payment. First-time home buyers are usually younger and not at the peak of their earnings, so waiting can help.
Take advantage of programs for first-time home buyers
If you’ve decided to take steps toward making a purchase, there are government programs that may help.
The most recent program is the First Home Savings Account (FHSA), a registered plan that came into effect earlier this year. The FHSA combines features from a Tax Free Savings Account (TFSA) as well as a Registered Retirement Savings Plan (RRSP). Like an RRSP, all contributions are tax deductible. When it’s time to withdraw, the gains are tax-free like a TFSA, if the money is used to buy a home within 15 years.
TD Bank says several thousand customers have signed up for this new type of account since it launched. Pat Giles, vice president of savings and investing at TD Bank, says the account has been popular with Millennials and Gen Z.
“Nearly half of the individuals who have opened a FHSA at TD have contributed the full $8,000 (limit) for this year. This younger demographic has already been saving and has been waiting for the vehicle to invest it in,” he said in an interview, adding that people shouldn’t delay opening an FHSA.
“The $40,000 lifetime maximum will only start in the year that you open the account and of course you have 15 years to have a first home savings account before you buy that first home.”
Giles says many customers combine the FHSA and Home Buyer’s Plan (HBP), which allows you to take up to $35,000 out of your RRSP tax-free as long as you repay the money in 15 years.
There’s also the First-Time Home Buyer Incentive, a shared equity mortgage with the Government of Canada that provides interest-free financing of five per cent and 10 per cent of the cost of a home to use toward a down payment. The loan must be repaid in 25 years or when you sell, and the repayment amount depends on the value of the property at time of sale.
Mary Gazze is a freelance journalist based in Toronto. Follow her on Twitter @marygazze.
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