You moved to Canada and are ready to call it home. To you, this might mean buying a home – but you're worried that the homebuying process you're familiar with looks a lot different in Canada.
While it's understandable to feel stressed at the prospect of figuring out how to navigate buying and financing a home in Canada, you shouldn't be worried, says Gurjeet Sidhu, a Home Financing Advisor at Scotia and an immigrant himself.
“The first misconception immigrants have about buying a home in Canada is that it's a very complex and cumbersome process,” he says. “But in reality, it's much simpler than many expect.”
So, just how do mortgage loans work in Canada? We'll break down everything you need to know about how to apply for a mortgage, the different kinds of mortgages that exist in Canada, how mortgages work, and the top things you need to know so that you can get started on your home buying journey.
In order to buy a home in Canada, you need a down payment – an amount of money that you put upfront towards the home to supplement your mortgage.
“Buying a home in Canada requires a down payment of at least 5% of the purchase price if the purchase price is less than $500,000. If the purchase is between $500,000 and $999,999 the minimum down payment is 5% of the first $500,000 and 10% of the amount over $500,000. If the purchase price is $1 million or more, the minimum down payment is 20%,” says Sidhu. If you have down payment of less than 20%, you can still get a mortgage but you will just need to pay for mortgage default insurance.
Mortgage default insurance applies to homes under $1 million. Mortgage default insurance costs between 2.80% and 4.00% of your mortgage loan, depending on how much you're borrowing and your down payment. Mortgage default insurance protects your lender in the event you default under the mortgage and the premium is paid by the borrower.
The good news is that you don't need to apply for it – mortgage lenders do it on your behalf and bill you directly in either a lump sum or by adding it to your mortgage balance.
In Canada, there are two main types of rates on mortgage loans – fixed-rate mortgages and variable rate mortgages, says Sidhu. Fixed rate mortgages lock you into a set mortgage rate for the term of your mortgage.
“That means that if interest rates go up, your mortgage interest rate will not change during the term,” says Sidhu.
Variable rate mortgages have interest rates that can vary over the term of your mortgage loan. That means that your interest rate and payment could go up or down during the term depending on your lender’s prime interest rate.
The benefit of variable rate mortgage loans, says Sidhu, is that they can give you a lower interest rate because you are taking the risk that it might go up over the life of your loan. The benefit of fixed rate mortgage loans is that you will know upfront how much you will pay in interest over the termof your loan and don’t have to worry about fluctuating monthly payments, but you will likely have to pay a higher interest rate - at least initially. With a fixed rate mortgage, you pay the same amount every month over the term of your mortgage, says Sidhu.
A loan term is the length of time that the interest rate, payment and other mortgage conditions under your mortgage will apply. At the end of the term, the mortgage is due and payable unless it is renewed. The term is often shorter than the mortgage's amortization time period which is the time it will take to repay the mortgage in full. For example, you can get a 5-year mortgage loan term with an amortization period of 25 years.
“In Canada, there are a number of terms to choose from – two years, three years, five years, or more depending on the mortgage lender,” says Sidhu. “Five years tends to be a very common mortgage term. That means that the borrower is locked into an interest rate agreement over that term. Once those five years are completed, the borrower can renegotiate their rate with the bank or to move to another lender.”
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A mortgage term can be closed or open. With a closed term, if you decide to repay the mortgage before the end of the term, a prepayment charge may apply. With an open term, you can generally repay the mortgage at any time during the term without a prepayment charge. “That's why it's important to make sure you choose the right term for you,” Sidhu says.
In some countries, the amortization period and the loan term are the same. But in Canada, they are often different. An amortization period is the period in which it will take you to pay off your complete mortgage debt (including interest), based on regular payments assuming a certain interest rate.
“Common amortization periods are 10, 20 and 25 years,” says Sidhu.
If you choose a longer amortization period, you will pay less monthly but more in interest over the life of your loan because you are borrowing money for a longer period of time. If you choose a shorter amortization period, your monthly payments may be higher, but you pay less interest over the life of the loan because you'll repay it sooner.
"Applying for a mortgage is easier than you expect," says Sidhu. In order to apply for a mortgage, all you need is some pieces of ID, a letter of employment or recent pay stubs or copies of your last two tax returns if you're self-employed, information about any existing debt you have, and information about your assets.
While many people apply for a mortgage in person, it's possible to get pre-approved, search for a home and get mortgage approval all in one place, all online with Scotiabank's eHOME Sidhu adds.
Many people want to shop around for a mortgage to get the best rate on their new home and to compare different types of mortgages. You can start by contacting your bank, credit union, or other lender to see if you can get pre-approved for a mortgage and how much they're likely to lend you on what terms. That will help you figure out the price range of a home you can afford before you go out shopping and fall in love with a home that's more expensive than your budget allows.
“Once we have your documents, we assess how much you can afford and you can get a commitment letter telling you how much you're pre-approved for,” says Sidhu.
Mortgage pre-approvals are generally valid for up to 120 days, depending on the lender. You can then come back with your pre-approval to apply for a mortgage when you find your dream home.
“Getting pre-approved makes it easier to apply for a mortgage later,” says Sidhu. “Also, you will know how much you're eligible to borrow in Canada – which might be different than you might be able to borrow back home.”
While mortgage default insurance is mandatory if your down payment is below 20%, you might also want to consider other forms of mortgage insurance.
Most lenders will offer something called creditor mortgage insurance -which is optional and could help to keep up with mortgage payments or pay off the balance if certain covered events, such as disability or critical illness, happen.
“Insurance is very important, especially when you are new in this country,” he says. “It's important to protect yourself and your home.”
When it comes to buying a home in Canada, there are some costs that you might not anticipate. Sidhu says that it's important that you budget for all of these in advance.
For example, you might have to pay GST or HST on your home purchase if you are buying a newly built home. You might also need to pay a foreign buyer tax if you aren't yet a permanent resident or provincial nominee in Canada. Some other taxes to consider are land transfer taxes and property taxes – which can vary depending on where you live.
When buying your home, there are also closing costs to pay for including things like lawyer fees, inspections, and other fees, says Sidhu.
Sidhu also advises his clients to remember to budget for condo fees.
“If you are buying a condo, you will have to pay a monthly condo fee as well,” he says. “It's for things like the maintenance of the common areas.”
The best way to get a good mortgage rate is to improve your credit score before shopping for mortgages.
“One option to build your credit score is to get a credit card as soon as you arrive in Canada and make sure you make your payments on time,” says Sidhu. “The higher your credit score, the less interest you will likely pay on your mortgage.”
Even a difference of a few percentage points in interest can make a significant difference over the life of your loan.
Sidhu also suggests shopping around by getting different quotes from different lenders. Some lenders might give you significantly different rates and loan terms.
You can apply for a mortgage online through Scotiabank's online mortgage hub eHOME. The application itself just takes minutes. You can download and print your pre-approval letter with exclusive online rates. Once you've made an offer, you simply submit your full mortgage application with all your documents through eHOME. You never need to visit a branch and you can track the status of your application online.1
Now that you're ready to go and apply for a mortgage, it's important that you avoid scams. One thing to look out for as a newcomer to Canada is people attempting to take advantage of your lack of knowledge around how the financial system here works.
“You should never share your SIN number with anyone unless you know that they're legitimate,” says Sidhu. “Make sure to reach out to a reputable financial advisor or home financing advisor to help you when you go looking for a mortgage.”
"A reputable lender will help you get the mortgage that is best for you," says Sidhu. They will also help teach you about the aspects of Canadian mortgage lending that you might not understand. Most lenders want to create a long-term relationship with you and will support you through the home buying process so you should see them as a resource along your homeownership journey, says Sidhu.
You can learn more about our mortgage options for permanent residents and temporary residents on our website, but we recommend booking an appointment with a home financing advisor to find out the latest information on the best mortgage options for you. You can also book an appointment with a Scotia advisor to learn more about our Scotiabank StartRight® Program offerings for newcomers like you.
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1 All mortgage applications are subject to meeting Scotiabank’s standard credit criteria, residential mortgage standards and maximum permitted loan amounts. You are required to meet with the lawyer who is completing the purchase of your home to sign documents and obtain the keys.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific investment and or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.