Mortgages in Canada: Tips for New Canadians
When you buy a home in Canada, the first thing you’ll need to do is take out a mortgage. The process of getting a mortgage is broadly similar no matter which country you’re in, but some of the details of applying for one in Canada might be a little different. This is especially true when it comes to what you need in order to qualify for a home loan.
As a new Canadian, you might find you’ll have some extra steps and hurdles to overcome, but once you know what to expect the process should become a lot easier. Let’s take a look at some tips that’ll get you off on the right foot when you begin your mortgage search.
How Mortgages Work In Canada
When you buy a home, the first thing you’ll need is a down payment. You’ll then use the mortgage to pay for the rest of the home. For example, if the home is $300,000, and you have a $50,000 down payment, you will take out a mortgage for $250,000.
Usually, these loans have a term of between 10 and 25 years, though the contract will renew every three to five years. The loan will have an interest rate, and the interest is amortized over the term of the loan. This means that initially, a large percentage of your monthly payment is going toward interest.
In fact, only a small amount will go toward the principal balance at the beginning of your mortgage. As time goes on, the percentages shift and a higher percentage of your payment goes toward the principal balance, which is the amount you originally borrowed.
Your monthly mortgage payment may also include payments that go toward property taxes and homeowners insurance. Details vary from home to home, but you have to remember to include these costs when you plan your budget. These costs usually add a few extra hundred dollars to the monthly payment, and that can affect how much you can afford to borrow.
How Much Will I Need For A Down Payment?
The amount of money you initially spend on a down payment will greatly affect the amount you’ll eventually pay for your mortgage. Naturally, the more you put down initially, the less you’ll have to pay back. This means your monthly payments will be less, but saving up for a bigger down payment can have other benefits as well.
Canadian law requires a minimum of at least a five percent down payment on a home purchase. However, this is only a minimum and only on a principal residence. If you put down less than 20 percent, you’ll have to plan for CMHC Mortgage Insurance. Depending on the cost of your home and the interest rate, this could add several hundred dollars to your monthly mortgage payments.
As a new Canadian, you might not have a high enough credit score to qualify for a mortgage with a five percent down payment. The mortgage lender will tell you how much you need.
Open vs. Closed Mortgages
Once you have your down payment, you’ll need to decide what type of mortgage you want to apply for. In general, there are two different types of mortgage: open and closed.
With an open mortgage, you’ll have a lot more flexibility when it comes to making payments. So for example, if you found yourself with some extra cash you’d be able to increase your monthly payments or even pay off some of the loan in a lump sum. With a closed mortgage, you could be penalized for paying off a large chunk of your mortgage early.
The trade-off to this is that a closed mortgage will usually have a much lower interest rate. Run the numbers or use an online mortgage calculator to find out what the best solution is for your budget.
Fixed vs. Variable Interest Rates
You’ll also need to decide whether you want to take out a mortgage with a fixed or variable interest rate. Both have their own sets of pros and cons.
A fixed-rate mortgage is fairly straightforward – the rate of interest you’ll pay is set for the lifetime of the loan, so you’ll always pay the same amount each month. This makes it much easier to plan for your budget.
A variable-rate mortgage, on the other hand, will fluctuate according to market trends. This can be a gamble – if the rate goes down you could see lower interest payments, but it also means your payments could go up if the market swings the other way. You could potentially save a good amount of money with a variable-rate mortgage, but it also makes it harder to plan ahead for your budget. If you choose a variable-rate mortgage, be sure to have some emergency funds set aside, just in case.
You should also consider talking with a mortgage specialist who works with new immigrants. They will be able to help you decide.
Overcoming Credit Challenges As A New Canadian
Banks look at credit scores to determine whether or not to loan money to buyers. Unfortunately, new Canadians may not have established enough Canadian credit to qualify for a mortgage. This can make it challenging to get the mortgage you need, even if you have a good job and have always made financially responsible decisions.
If you’ve had good credit in your home country, ask the bank if they can use a credit score from that country. Some banks will allow this, depending on how the home country measures its citizens’ creditworthiness. If this is not possible, you may need to rent a home for a few years, working hard to build up your credit in Canada. To build credit, you must have a credit card or take out some type of loan, like a car loan. Make your payments on time, and keep your debt to a minimum.
Another path for new Canadians to get a mortgage is to have a large down payment. If you’re able to put down more than 20 percent for the mortgage – even as much as 50 percent – the bank will see you as far less risky than someone who only has a five percent down payment. This is particularly beneficial if you have a good job to go along with the down payment. It really depends on the bank.
Finally, many banks have special programs catering to the needs of new Canadians. Sign up for an account with one of these banks to start building up your credit, and they’ll be able to guide you through the process of buying your first home as well.
Affordability Is Key
The most important thing is to think about affordability.
You need to be able to afford your monthly mortgage payment along with any other expenses you might have as a new Canadian. Use mortgage calculators that include property taxes and homeowners’ insurance to get a better sense of what a mortgage payment for homes at different price points will look like. Compare those to your monthly budget and make a smart choice.
Don’t forget to think about other things you will need to budget for, including utilities, groceries, a car payment and gas, and other things that might come up. It’s always best to apply for a mortgage amount that feels comfortable rather than overextending your budget and being “house poor”.
Don’t Be Afraid To Get Some Help
If you’re a new Canadian and you’re struggling to afford a new home, there are also several programs in place that can help you to get started.
Sagen’s New to Canada Program assists new Canadians in qualifying for a mortgage with a small down payment. To qualify for this program you must:
- Have worked full-time in Canada for at least 3 months
- Have a valid work permit or Permanent Residency status
The CGMI Maple Leaf Advantage (New to Canada) Program allows new Canadians with a limited credit history to buy their dream home with as little as a 5% down payment. To qualify for this program you’ll need to:
- Have moved to Canada within the last five years
- Have a valid work permit, permanent resident or landed immigrant status (diplomats or other foreign-appointed clients are ineligible)
- Have worked full time for at least three months in Canada (if you have transferred under a professional relocation program you’ll be exempt)
- Buy a property with no more than two units, and live at the property
- Have at least the minimum 5% down payment from your own sources
Depending on how much you’re able to provide for a down payment, you’ll also need to provide:
- For a 5% down payment – an international credit bureau or 12 months’ rental payment history confirmed by a letter from the landlord (and 12 months of bank statements) with at least 1 utility payment (confirmed by a letter from the service provider) or 12 months of statements confirming regular payments.
- For a 10% or more down payment – Six months’ worth of bank statements from a recognized Canadian financial institution (or the client’s financial institution in their country of origin) or a letter of reference from the client’s financial institution in their country of origin confirming a satisfactory banking relationship for at least 6 months.
New Canadians have unique challenges when it comes to qualifying for a mortgage, but they’re relatively easy to overcome. Speak with an Area Manager to get a better sense of what a mortgage means for you.
Originally published April 5, 2019, updated October 7, 2021
Photo credits: depositphotos.com