As a new Canadian, the process of getting a mortgage can be intimidating and overwhelming. Fortunately, there are resources available to support individuals in this situation. Mortgages for new Canadians can involve a more rigorous credit check as lenders want to ensure that applicants have a stable financial history. When applying for a mortgage as a new Canadian, it is important to show proof of income through pay stubs or an employment contract. It may also be helpful to provide proof of residency, such as utility bills in your name. Additionally, it may be advantageous to secure a larger down payment, as this demonstrates financial stability and can result in better terms on the loan. Working with lenders who have experience in mortgages for immigrants and new Canadians can also increase your chances of success. While there may be extra steps involved, obtaining a mortgage as a new Canadian is possible with preparation and diligence.
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.
Related resource: What is a Good Credit Score in Canada?
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.
Mortgage Solutions for Newcomers to Canada
As a newcomer to Canada, you want to get settled as quickly as possible, and this means purchasing a home so you can put down roots for your family. Because it is such a large purchase and you’ll be making payments on it over time, one of the first things you’ll need to do is qualify for a mortgage.
The typical mortgage charges interest based on rates that the government and Bank of Canada set, as well as the borrower’s credit score, and is usually paid over a period of 25 years. New Canadians may not understand all the details of these loans, so we’ve put this guide together to help you understand the basics and what you’ll need to do to get your mortgage.
How Long Have You Been in Canada?
The amount of time you’ve been in Canada can play a large role in getting your mortgage. Lenders typically like to see that you’ve been living in Canada long enough to be “established”.
For instance, they want to see you’re gotten regular paychecks from an employer in Canada. They want to see what you’ve built up some positive credit history. If you’ve been here for less than a few months, it could be harder to qualify for a mortgage.
As soon as you get to Canada, you should work on setting up your finances so you’re prepared to buy a home.
Tips For Choosing a Bank in Canada
There are a lot of different banking options in Canada. Deciding on the right one for you might seem overwhelming at first, but you can simplify the decision by asking yourself a few questions:
- Do I need a location that’s close to my home? If you’re currently renting, consider where you might eventually want to move to as well as where you currently live.
- What kinds of mortgage services do they offer? Do they have competitive interest rates?
- Does the bank offer any additional services that might be helpful, such as home insurance?
- Do they have any programs or services designed specifically for new Canadians?
- Do they offer other forms of support for immigrants, such as free international money transfers?
Once you start to filter down your options by applying these questions, the decision will start to get easier.
When you’ve chosen your bank, the first thing you’ll need is a checking account. This will allow you to write cheques or use a debit card to access the money you need for your daily living expenses. Savings accounts are for longer-term savings, and the money in them is usually harder to access. You’ll also want to apply for a credit card which you need to start building up a credit score.
Banks That Offer Services For New Canadians
Some institutions that offer mortgage services for new Canadians include:
- RBC Mortgages for Newcomers to Canada
- Bank of Montreal’s Newcomers to Canada Resources
- Scotiabank Mortgage Program for Permanent Residents
- CIBC Welcome to Canada Banking Package
Do These Things to Build Up Your Canadian Credit
Lenders look at your credit history to determine how risky of an investment you are. If you haven’t been living in Canada for a long time, it’s harder for them to know whether or not you’ll behave responsibly with credit.
The best way to do this is by building up your credit score. This can be tricky because a lot of the payments you might normally make – rent, utilities, and cell phone, for example – rarely count toward your credit history, even if you make on-time payments.
The key to building up credit is to use a credit card and/or take out a loan, then make regular, on-time payments. You can avoid fees by charging small amounts on the credit card, then paying it off in full for each statement period. While credit cards can be tricky to get if you don’t have a good credit score, some banks specifically work with newcomers to Canada who are looking to build up their credit here.
How Much You’ll Need to Save For a Down Payment
When you buy a home, you need to have a down payment. This needs to be at least 5 percent of the value of the home, and you need to have the money in a savings account. The lender will check to see if you have this money before they approve your mortgage application.
Because newcomers to Canada don’t have a long credit history, they represent a bigger risk to the lenders. If you’re able to have a high down payment (20 percent or more), then it will be easier for you to get a loan. Of course, that’s a significant amount of money. If you were to purchase a $300,000 home, for instance, you’d need $60,000 in cash for the down payment.
Where Should You Apply For a Mortgage?
Apply for your mortgage through a bank or a mortgage lender. If you’re a newcomer, look for companies that specialize in providing this service to those who are new to Canada. They’ll have more understanding of your situation and how to best serve your needs.
Sometimes, you can get a good deal by going with the bank you already use for your banking or credit cards.
At Sterling Homes, we know how confusing the home buying process can be for newcomers. We want to help you every step of the way. Get in touch with us or call our Online Sales Concierge at 780-800-7594 and see how easy it can be to get started.
Mortgages in Canada: Your Mortgage Document Checklist
Qualifying for a mortgage in Canada can feel like a daunting process, but it doesn’t have to be. When you create a mortgage document checklist, it’s much easier to gather all the required information before you start the application process. The end result gives you a smoother home buying experience.
We’ve covered each mortgage document below so you will know what to include in your checklist. Lenders will then be able to see your current financial situation including your credit history and can then help you get approved for the home you want.
With the hustle of gathering all of the usual paperwork required for the mortgage, it’s not unusual for people to forget about the application itself! Sometimes, you’re able to fill this out online and then bring the documents in person. However, most lenders have a paper form to fill out.
Talk with your mortgage lender to find out if you can fill out the application ahead of time to bring with you to your appointment, along with the other documents listed below.
Proof of Income
Lenders will need to verify the current income for all parties included in the application. This comes in the form of a letter of employment from your employer, as well as your Canada Revenue Agency Notice of Assessment (NOA) from your latest tax return. For those applicants who are self-employed, lenders require two years of NOAs.
Also, if you have worked for your current employer for less than two years, you may be required to present information about your previous employer and income.
Your income includes any wages from your primary employment, any part-time work you do, and outside sources of income such as alimony, child support, tax benefits, etc.
Don’t forget about your investments! Products such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs) count toward your income which will help you in qualifying for your mortgage.
Be sure to bring all related paperwork pertaining to these items noted above.
Consent For a Credit History Search
In order to determine your credit rating, the mortgage lender will ask for permission to check your credit history. This will usually involve signing a form authorizing them to access your records. This helps the lender ensure you’re not a risk to lend to.
Sometimes you can fill out this form ahead of time. If not, your lender will have it ready for you at your appointment.
Proof of Down Payment
All mortgage lenders require a minimum of five percent down payment on your total purchase price. The law requires proof of the origin of these funds to prevent fraud, and lenders require proof to ensure this investment is coming from your own sources.
This could include such documents as bank statements showing the available funds, a gift letter from relatives if you are receiving funds from them to assist in your down payment, or the paperwork relating to a bridge loan or Home Equity Line of Credit.
If you’re taking advantage of some of the Government of Canada’s available down payment assistance programs, such as the First Time RRSP Home Buyer’s Plan, or the Home Buyer’s Plan, be sure to bring the related paperwork for these programs.
Property Details For Your New Home
If you’re applying for a mortgage pre-approval, this information is not required as you haven’t yet chosen the home you’re purchasing. However, if you are applying for a full mortgage, the property details to which the mortgage will be applied need to be provided to the lender.
Lenders will need a copy of your purchase agreement, real estate listing (if applicable), information pertaining to the property taxes and estimated heating costs, and condo fees (if applicable). They will also require your lawyer’s full contact information.
Property Details For Your Previous Home
This won’t apply if you’re purchasing your first home, but if you’re also selling your previous home you may be required to provide some documents about the house you’re selling, such as…
- Property Tax Bills/Statements
- Recent Mortgage Statements
- Details on Your Home Insurance
- A Legal Description Of Your Property
The amount owing on your current mortgage, and other debts (such as a HELOC) can affect the application for your new mortgage, so it’s important to have all this information to hand right from the start.
Not all mortgage lenders are the same, and some may require other information in addition to what is listed here. However, this is a list of the minimum requirements by virtually all mortgage lenders. By collecting all these documents before your application, you’ll be sure to get through the process more efficiently and allow your lender to provide you with an accurate qualification in time to close on your ideal new home.
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