Planning Your First Home Purchase in Canada

Author: Kate Kim

For those looking to purchase their first residential home in Canada, there are various government benefits available.

What is the definition of a First-Time Home Buyer?

You qualify as a ‘first-time home buyer’ if you have not owned a home in the last four years, including overseas properties, or if you owned one but did not actually reside in it, instead renting it out purely for investment purposes. However, both spouses or common-law partners must meet this condition; if even one person has owned and lived in a home within the last four years, they are excluded from the benefits.

To buy a house using a mortgage in Canada, you must first save for a down payment. Typically, it is recommended to prepare about 20% of the home purchase price for a stable loan. Self-employed individuals, who operate businesses, often require a down payment of more than 20% due to different document review standards compared to salaried employees. However, as various programs exist among financial institutions, it is highly recommended to consult a professional mortgage broker before purchasing a home.

💡 Utilizing First-Time Home Buyer Benefits to Secure Your Down Payment

1. Utilizing an RRSP (Registered Retirement Savings Plan)

An RRSP is primarily a retirement savings account, with an annual maximum contribution limit proportional to income. Contributions are tax-deductible in the year they are made, and taxes are paid upon withdrawal in retirement. Since income brackets are typically lower in retirement than during working years, this offers excellent tax-saving benefits.

First-Time Home Buyer Benefit: You can withdraw up to $60,000 from this account tax-free, once in a lifetime, for a home purchase (HBP program).

Repayment Conditions: Repayment must begin in the fifth year after withdrawal, in annual installments of 1/15th of the withdrawn amount (over a maximum of 15 years). If you fail to repay the required amount for a given year (e.g., approximately $4,000 annually), the unpaid amount will be added to your income for that year and taxed, thus requiring careful planning for withdrawals.

2. Utilizing an FHSA (First Home Savings Account)

This is the best program for first-time home buyers. You can contribute up to $40,000 lifetime, with an annual contribution limit of $8,000. Like an RRSP, contributions are tax-deductible, and like a TFSA, withdrawals (for a home purchase) including investment income are completely tax-exempt.

Caution: If you contribute more than the annual limit, a 1% penalty per month will be applied to the excess amount.

Unused portions of the annual limit ($8,000) can be carried forward to the next year, up to a maximum of $8,000. This means if you made no contributions this year, you could contribute up to $16,000 next year. However, if you only contributed $4,000 this year, you cannot contribute $12,000 next year, as the maximum annual contribution limit remains restricted. Therefore, it is advantageous to consistently contribute $8,000 each year.

If you decide not to purchase a home after accumulating funds, you can transfer these funds to an RRSP account without tax penalties.

3. Utilizing a TFSA (Tax-Free Savings Account)

Any Canadian resident aged 18 or older can open a TFSA, and the annual contribution limit set by the government (recently around $7,000-$7,500) accumulates each year. If you haven’t used your limits in the past, you can contribute the accumulated amount all at once. (e.g., if you haven’t contributed for 10 years since turning 18, you could contribute tens of thousands of dollars at once).

All profits earned from stock or ETF investments within this account are 100% tax-free. This makes it an excellent tool for growing your seed money.

Tip: If you have a short-term plan to buy a house within 1-2 years, it is recommended to use safe financial products like GICs (Guaranteed Investment Certificates) rather than stocks, due to the risk of losing principal from stock market volatility. Be aware that exceeding the contribution limit incurs a 1% penalty per month.

💸 Other Additional Costs Incurred When Purchasing a Home

1. Consider GST When Purchasing a Newly Built Home

When buying a new home or building one yourself, a 5% GST (Goods and Services Tax, a federal consumption tax) is applied. Fortunately, if you are a first-time home buyer and intend to reside in the home yourself, you can utilize the government’s GST Rebate policy. (Government policies and home price conditions are subject to change, so professional verification at the time of purchase is essential).

2. Prepare for Closing Costs

You should prepare approximately 1.5% to 4% of the home purchase price as separate cash for closing costs. These costs include legal fees, legal document registration fees, Land Transfer Tax (note: Alberta does not have a Land Transfer Tax, only inexpensive registration fees), title insurance, property tax and utility adjustments (prorated with the seller based on the closing date), home inspection fees, and appraisal fees.

3. Prepare for a Deposit

Once an offer is accepted, a deposit of typically $5,000 to $10,000 (or 1-5% of the home price) must be submitted by cheque, usually within 24-48 hours. This money is held and then deducted from the total down payment amount at final closing.

💡 Example of Required Funds (When Tom buys a $400,000 home)

Down Payment (20%): $80,000
Closing Costs (Estimated): Approximately $8,000 ~ $10,000
Deposit: $10,000 (This amount is deducted from the down payment at final settlement, but cash is needed for immediate payment upon contract)
Total Stable Cash Needed: Approximately $90,000 ~ $100,000

※ 5% Down Payment and CMHC Mortgage Default Insurance

If you are employed and have verifiable income, you can get mortgage approval with a minimum down payment of 5% when purchasing a home under $1,000,000. However, if your down payment is less than 20%, banks are required to mandate CMHC (Canada Mortgage and Housing Corporation) default insurance.

Down Payment Percentage	High-Ratio Mortgage Insurance Premium (CMHC Premium)
5.00% ~ 9.99%	4.00% of the total mortgage amount
10.00% ~ 14.99%	3.10% of the total mortgage amount
15.00% ~ 19.99%	2.80% of the total mortgage amount

This insurance premium is not paid as a lump sum but is added to the total mortgage loan amount and included in your monthly mortgage payments. This increases your monthly repayment burden, so if circumstances allow, it is recommended to aim for a 20% down payment to avoid this insurance cost.

🏠 4 Things You Should Prepare Immediately Before Buying a Home

Manage Your Credit Score: A minimum credit score is required to get mortgage pre-approval. Typically, if your score drops below 680, approval from major financial institutions may be difficult. Conversely, a higher credit score allows banks to offer you the most favorable prime rates. Check your score regularly through your primary bank’s app.
Thorough Tax Reporting (Secure Income Documents): For business owners in particular, the last two years of tax returns (NOA – Notice of Assessment) and financial statements are key documents for mortgage review. It is crucial to strategically report your sales and personal income (T1) in advance.
Proof of Down Payment Source (Bank Account Management): When applying for a mortgage, banks require a minimum of three months’ (90 days) worth of bank statements. Due to anti-money laundering regulations, sudden deposits of cash with an unclear source will not be recognized as down payment funds. At least 90 days before purchasing a home, you must consolidate your funds into one account and manage them in a way that allows you to prove their origin.
Avoid Late Payments: It is advisable to set up automatic payments for all utility bills, business fees, and product payments to ensure no single payment is delayed, even by a day.

💰 Tips for Accumulating Seed Money Faster

Keep a Household Budget: Seeing the flow of income and expenses allows you to prevent unnecessary spending and increase your savings potential.
Separate 3 Months’ Emergency Funds: In addition to your down payment savings account, keep 3 months’ worth of emergency funds for urgent business or living expenses in a separate cash account. This prevents you from having to dip into your home savings account for emergencies and helps maintain psychological stability.
Save First, Then Spend: Never attempt to save what’s left after spending. Instead, set up an automatic transfer to save your target amount each month first, then manage your business and living expenses with the remaining funds.
Short-Term Investments in Safe Assets: If you plan to buy a home within 2 years, GICs (Guaranteed Investment Certificates) with 1-2 year fixed interest rates from banks are recommended over stocks or highly volatile ETFs. While ETFs generally trend upwards in the long term, they can experience sharp drops due to short-term global affairs or economic crises, leading to principal loss at the time of purchase. Unless you have a long-term plan of 5 years or more, fixed-rate products that guarantee your principal are safer.
Mind Control and Positive Attitude: When running a business, you might encounter off-seasons and burnout depending on the time of year. By wisely accumulating profits earned during peak seasons (summer) to prepare for off-seasons (winter), you can steadily save your seed money without stress.

💳 Tips for Improving Your Credit Score

Use Credit Cards Wisely: For the best impact on your credit score, aim to keep your credit utilization under 30-35% of your total credit limit (e.g., if your limit is $10,000, use less than $3,500). Ideally, you should pay off the full statement balance every month, and even if circumstances are difficult, never miss the minimum payment. If you can increase your credit limit, do so, but keep your actual spending the same; this lowers your credit utilization ratio, which quickly boosts your score.
Pay Utility and Communication Bills on Time: Long-term overdue utility bills such as cell phone, internet, electricity, and gas can be reported to credit bureaus and severely damage your credit score.
Adhere to Product Payments and Vendor Settlements: Intentionally delaying payments or stopping them due to disputes can lead to the debt being transferred to a collection agency. Once your name appears in collections, it becomes a fatal blow to your credit score.
Opening and Utilizing a Line of Credit (LOC) for Emergencies: As you successfully operate your business and build credit, banks may offer you a Line of Credit (LOC). If you keep a LOC open but don’t use it, no interest is incurred. While credit card cash advances have exorbitantly high interest rates and severely damage your credit score, LOCs offer much lower interest rates. Moreover, simply having an LOC open increases your personal ‘total credit limit,’ which significantly helps improve your credit score even if you don’t use it. It’s an excellent option to use as emergency bridge funding during urgent cash flow crises.

This article is intended for general informational purposes only. Canadian government policies and financial institution mortgage guidelines can change frequently depending on individual circumstances and timing. Therefore, when actually purchasing a home, it is essential to consult with professionals (real estate agent, mortgage broker, accountant).