Mortgages in Canada: Tips for New Canadians
If you want to buy a home in Canada, you’re going to need to take out a mortgage. You’ll probably find that the process of applying for a mortgage is quite similar to what you’re used to in your home country, but there may be some differences. As a new Canadian, there are a few extra hurdles to jump over, but with the right knowledge, you could be moving into your home in no time at all.
How Mortgages In Canada Work
When you buy a home, you’ll need a down payment, but you’ll pay for the rest of the home with a mortgage. Usually, these loans have a term between 10 and 25 years, though you’ll have to renew the contract between three and 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 few hundred dollars might go toward the principal balance. As time goes on, though, the percentages shift and a higher percentage of your payment goes toward the principal balance.
Your monthly mortgage payment may 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 think about affordability. These costs usually add a few extra hundred dollars to the monthly payment.
The Right Mortgage For You
In general, there are two different things you really need to look at: whether the mortgage is open or closed; and whether the interest rate is variable or fixed.
With an open mortgage, it’s easier to make adjustments based on your needs. For instance, you can make extra payments. This is nice for those who want to pay the loan off quickly, especially those who may sell the home before the term of the loan is up. Closed loans have more restrictions.
In a fixed rate mortgage, the interest rate remains fixed for the term of the loan. This is the best choice for those who want a steady mortgage payment the entire time. In a variable rate mortgage, the interest rate changes after a given period — usually a year or two. The initial rate on a variable mortgage tends to be lower than the initial rate in a fixed mortgage, but it can jump much higher, causing the monthly payments to dramatically increase.
Each of these types of mortgages has advantages and disadvantages, so it’s up to you to determine which option is right for you.
Down Payment Requirements
Canadian law requires at least a five percent down payment on a home purchase. However, this is only a minimum. Having more money is always advisable. Those who have less than a 20 percent down payment will have to pay an extra cost: CMHC mortgage insurance. This can add $100 or more to the monthly payment, and it will cause you to qualify for a smaller loan than you may want.
Overcoming Credit Challenges
Banks look at credit scores to determine whether or not to loan money to buyers. Unfortunately, new Canadians may not have 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’ credit worthiness. 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 might be to have a large down payment. If you’re able to put down more than 20 percent for the mortgage — or 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, particularly if you have a good job to go along with the down payment. It really depends on the bank.
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 that 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.
Get Some Help
If you’re a new Canadian and you’re still struggling to afford a new home, there are also several programs in place that can help you to get started.
Genworth’s New to Canada Insured Mortgage Program provides assistance to new Canadians in qualifying for a mortgage with a small downpayment. To qualify for this program you must:
- Have relocated or moved to Canada within the last 60 months
- Have worked full-time in Canada for at least 3 months, unless you have moved under a corporate relocation program
- 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 5 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 3 months in Canada (if you have transferred under a professional relocation program you’ll also be exempt)
- Buy a property with no more than 2 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% Downpayment – 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 Downpayment – 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 are not terribly difficult to overcome. Speak with a New Home Advisor to get a better sense of what a mortgage means for you.