Your first year in Canada can be both exhilarating and challenging at the same time. Canada has so much to offer new residents, but you may still have many concerns such as job-hunting, family relationships, living accommodations, and becoming accustomed to the Canadian lifestyle. The latter is something that can be easily tackled with the right knowledge in hand. With some patience, you’ll be on your way to obtaining your first piece of real estate.
There are two main concerns when looking to purchase a property, the first is “credit” and the second is “downpayment.” Credit refers to a deferred payment arrangement, meaning a lender gives access to funds so you can make your purchase, and you repay the borrowed funds later. Credit institutions such as Transunion and Equifax, collect consumer data to produce credit reports and credit scores. Credit reports will show your personal and financial info, such as where you have lived, places of employment, income, etc. Your credit score ranges from 300-900 and represents your credit risk at a particular point in time. The higher your score, the more likely you will pay your loans on time in the eyes of the lender. With a higher credit score, lenders will see you as a “credible” which means you will be more likely to receive loan approvals or better interest rates on your loans.
Perhaps you’re asking yourself, “How do I build credit?” Well, the simple answer is by getting and using a credit product and having it report on your credit record. Ask yourself: How many credit cards do I have? How many car loans? How many phone bills? These are all examples of “trades”, a credit account, which will show up on your credit report. Based on your payment habits and balances carried on your accounts, your credit score and report is derived. It is always recommended that you pay your bills on time as a good way to build credit.
There are many ways to check your credit score. Many banks allow you to check your credit score if you have an online banking account with them. For example, RBC has the TransUnion CreditView Dashboard that allows you to view your current credit score online. For a fee, you can also view your credit report on sites such as Equifax or Transunion’s official website. Lastly, you may contact one of Canada’s credit bureaus to receive a copy of your credit report by mail, free of charge.
Credit is extremely important because it is one of the main factors that determine the quote you receive from banks when you apply for any of their products. For example, if you are applying for a mortgage, there will be a matrix that helps the bank price out and quote for the mortgage. Based on your income, type of employment, and credit score/record, you’ll get quoted for the mortgage – how much the bank will lend you.
After, building your credit, your next worry is “downpayment”. A Downpayment is the amount of money you pay up front to obtain a mortgage. Conventional mortgages require a downpayment of 20% of the purchase price or more. However, with high-ratio mortgages, you can pay as little as a 5% downpayment. Buying anything with less than 20% downpayment brings another party to the transaction. They are called insurers (the bank is essentially purchasing mortgage default insurance and transferring the cost to you). Although, you have to pay for mortgage default insurance, the task of saving up for a downpayment is also made a little less daunting because you don’t need to save up for such a large downpayment. For example, qualified homebuyers who have immigrated or relocated to Canada within the last 5 years are eligible under Genworth’s New to Canada program to purchase a property with as little as a 5% downpayment.
Here is an example to help you better understand:
Purchase price: $500,000
Downpayment: 5% of $500,000 = $25,000
You’ve covered $25,000 of the $500,000 purchase price. You still need $475,000. This is where you will need a mortgage.
Amount of mortgage: $475,000
Cost of mortgage insurance: $19,000 (4% of $475,000)
Mortgage insurance amount is determined by the mortgage insurance premium rate (4% in this example). The rate is calculated as a percentage of the loan and is based on size of downpayment. Usually, the larger downpayment you make, the lower the rate meaning you pay less mortgage insurance.
Total mortgage amount: $494,000
Those numbers might have made your eyes pop a little and maybe you’re even feeling a bit defeated right now. Don’t fret, the downpayment is achievable and saving for it can be done by taking baby steps. Change your mentality and think of it like this: you don’t have the money now, but by next year, this time, you will have saved x amount for your downpayment.
Tips for Saving for Downpayment
- Prioritize – make saving for downpayment one of your top priorities
- Pay off credit card debts
- Set up a regular automatic savings plan
- Save any bonuses from work, monetary gifts, etc
- Look for cheaper alternatives in your day-to-day life
- Borrow from your RRSP
- Get a Tax Free Savings Account
- See if your city has a First Time Homebuyers Program
Whether you’re starting from scratch or already have some money set aside for your down payment, make a timeline and figure out how much you need to save monthly/annually. If your goal is to save 5% for your downpayment in five years, you’ll need to save approximately $417 each month ($25,000 divided by 60 months).
The best ingredient in a savings strategy is patience. It takes time to save up enough money to buy a home in Canada. Get in the habit of saving, spending less, and becoming disciplined to be truly ready for the challenges ahead.