Buying a home is one of the biggest purchases most people will ever make. It is very common for people to own their homes in Canada. The 2011 National Household Survey (NHS) showed that 69.0% of households in Canada, or 9.2 million of 13.3 million households, owned their dwelling. Owning a home can be a good strategy to building wealth, as houses tend to increase in value overtime. If you are considering buying a home now, or in the near future, here are a few things to keep in mind before you start the house hunt.
Types of houses in Canada
Townhouses and apartments
Townhouses are rows of houses with a shared wall between them. Unlike semi-detached houses, a townhouse can share a wall on each sides with other homes. These type of houses are usually condominiums.
Condominiums (Also known as a “Condo”) is a type of home ownership. These are typically apartments or townhouses where you own only your apartment or unit, and share common areas with other home owners. This can include elevators, pools, gyms, and so on. In a condo, you do not own the land on which your unit sits, and you are required to pay condo fees to pay for general maintenance of the property, like mowing, replacements of windows, insurance and electricity. A board is appointed to oversee the affairs of the condo units and make decisions for the home owners.
Semi Detached homes
Semi detached homes are two homes connected by a single wall. The homes are similar in look and structure, and the shared wall is thick enough to prevent noise from passing through.
These are also referred to as single family homes. The single house sit on individual lot, and you own both the structure, as well as the lot your house sits on.
How much do houses cost?
According to the Canadian Real Estate Association, the national average price of houses in Canada in July 2017 was $478, 696. British Columbia leads the provinces at an average of $698,718 while Manitoba has the lowest average of $283,978. The cost of a house is usually affected by size, local economy, employment condition, location and proximity to amenities such as transportation, school , parks etc.
Can foreigners own properties in Canada?
Owning a property in Canada does not give you any immigration privileges. Foreigners or non-residents are able to own properties in Canada, just like Canadian citizens or permanent residents. Recently, the government of Ontario and British Columbia introduced a tax of 15% of the value of a property for foreigners wishing to purchase property in those two provinces.
Down Payment and Interest
Down payment is your own money that you put towards the purchase of a house. The balance is obtained from a financial institution in form of a mortgage. If you are new to Canada, the requirement for a down payment may differ for you. Generally, banks want to see proof of income or employment history before advancing loan.
To purchase a house under $500K, you need to have 5% of the value of the property as down payment. If you are buying a property over $500,000, the minimum down payment required is 5% for the first $500,000 and 10% for the remaining portion. Homes over $1M, requires a down payment of 20%. If the down payment on your house is less than 20%, you are required by law to get Mortgage Default Insurance.
The default insurance is based on a percentage of the home’s purchase price that is financed by a mortgage. It is collected upfront in case you default on your mortgage payments. This can be paid as a lump sum or added to your mortgage, and forms part of your monthly mortgage payment. To determine how much premium is due on the home you want to purchase, use the calculator on the Canada Mortgage and Housing Corporation website.
The maximum amount of time to pay back a residential mortgage loan in Canada is 25 years. Mortgage loans however, are advanced in terms of 1-7 years. At the end of your mortgage term, you will renew the mortgage at the current interest rate in effect. The rate of interest you get from banks depends on your credit worthiness.
Banks offer fixed or variable interest rates on a mortgage loan. As the names implies, a fixed interest rate does not change during the term of the mortgage, which is usually between 1-7 years, while variable rates fluctuates with the going market rates.
Where do I find properties for sale?
Majority of houses for sale in Canada are listed online on popular websites like:
You can also find houses for sale through private sales not listed on these websites, and from owners selling their homes without using an agent.
Real Estate Agents and Commission
Typically, to get your house listed online on these websites, you need to work with a Realtor or Real estate agent. Realtors are professionals who are licensed to sell or buy properties for clients. The agent is usually compensated by the seller, and the same agent can represent both the buyer and the seller. Having the same agent is not recommended because of conflict of interest. In a case where different agents represents the buyer and the seller, both agents share the commission on the sale of the home.
The commission varies depending on the agent you use and the value of the property. This is typically in the neighbourhood of 5% or can be a flat fee. You do not need an agent to represent you when selling or buying, but these professionals are knowledgeable and can make the process very smooth for you.
Making an Offer
Once you find the house you love, the next step is to make an offer to the seller, indicating your intention to purchase their property. This is done formally through a letter of offer. It is a binding agreement, and is accompanied with a deposit, so the seller knows you are serious. Once the seller accepts your offer, you cannot back out of it. To protect yourself, it is common for buyers to make a “Conditional offer” to the seller. This means is the buyer is willing to purchase the house if certain conditions are met. These could be things like a satisfactory home inspection, and getting approved for the mortgage by the lender. If you back out of the deal for reasons not stated as part of the conditional offer, your deposit may not be refundable.
Pre-Approval and Bank Loan
Getting a pre-approval from the bank before going house hunting is a great idea. What this does is to give you an idea of how much banks are willing to loan you, and the price range of homes you can afford. The pre-approval is an unofficial agreement between you and the bank to loan you money at the going rate once you find a house you like. This agreement is typically good for 90 days. If interest rates go up within 90 days, the bank will honour the rate on the agreement you signed with them, saving you money. If you are unable to find a house you like within 90 days, the agreement can be renewed after expiration.
The general affordability rule is that your total monthly payments, including mortgage, insurances, taxes and utilities should not exceed 30% of your income.
Closing Costs and Ongoing Costs
There are one time costs as well as ongoing costs associated with purchasing a home in Canada. If you are buying a new home, you will pay an additional 5% GST on the purchase price. To finalize your purchase transaction, you need a lawyer who will complete the required paper work and transfer the ownership deed to you. The lawyer is also responsible for forwarding the money to the seller. Appraisal fees might be incurred if you or your bank requires this.
In addition to the mortgage payments made to the banks monthly, the following are other monthly expenses that comes with home ownership;
- Property Tax: paid to the city, town, or municipality where your home is located.
- Utilities: This is the cost for water, electricity, gas, and garbage collection for your home.
- Property Insurance: By law, you are required to insure your home against fire, flood or natural disaster.
- Home owner association fee: Some home owner associations may require this for houses in certain neighbourhoods.
- Condo fees: If you buy a condo, you will be required to pay monthly condo fees to cover the maintenance of common areas.
Responsibilities of Homeowners
Canadians take pride in taking care of their homes. As a homeowner, it is your responsibility to keep your lawn mowed and your driveway clear of snow during winter. You are also responsible for paying utility bills and other costs associated with owning a property.
Speaking of winter, your furnace filter needs to be changed regularly to avoid unnecessary expensive breakdown.
Tax Implication of Owning a Home
In Canada, the house that you live in is considered your primary residence. If you sell this house and make a profit on the sale, you are not required to pay taxes on the profit. On the other hand, if you own properties for investment purposes, e.g. a rental house, you will pay taxes on the capital gain you realize on the sale of the house. For more information on this, contact a professional accountant or visit the Canada Revenue Agency website.
Owning a home can be very exciting but also comes with responsibilities. With the few points covered in this post, you are better prepared to take the leap into homeownership.