Canada is one of the most welcoming countries for immigrants from all backgrounds and ethnicities. According to Canada’s 2016 census, 21.9% of the Canadian population were foreign-born immigrants. On average, it admits more than 300,000 immigrants every year. This open border policy presents many opportunities and challenges.
If you’re considering a move to Canada to get a fresh start, buying a residential property within a few years of arriving In Canada part of your plan. The process is fairly simple but the requirements for new immigrants are different from the people who have credit history in Canada so it’s important to have the right information when making plans. This article looks at the total amount a new immigrant will need to buy a property in Canada.
How down payments for mortgages work in Canada
In Canada, the majority of people who buy property do so with a loan (known as a mortgage). The lender could be one of Canada’s big banks (RBC, TD, Scotabank, BMO or CIBC) or other financial institutes. People typically get the mortgage either directly from the lender or go to the mortgage broker to compare different lenders’ rates.
The mortgage system requires homeowners to pay a down payment for a percentage of the total loan amount. The down payment amount depends on multiple factors and can be as low as 5% of the property price but the typical amount is 20%. There are a few first time home buyer incentives that make the payment even more manageable. When the down payment is less than 20% of the property price, the buyer is required to purchase CMHC mortgage insurance which protects the lender from the risk of borrowers defaulting.
This route may not be available to you if you’re brand new to Canada or haven’t yet arrived. Financial institutions use your credit history to determine whether or not you’re a trustworthy borrower. When moving from another country, in many cases, there is no credit history to draw on so banks are unable to lend to you in the same way they would a long-time resident.
There is another way to secure a mortgage and buy your first property when you first arrive in Canada. It requires a much larger deposit. Most lenders (e.g. banks) will require you to pay a 35% of the property value as a down payment. If you use a mortgage payment calculator, you’ll realize that this is a sound strategy to lower your mortgage payments but it’s simply too much for most new immigrants to afford.
In addition to the down payment, banks require you to have immigrated within the last five years, hold permanent residence status, be able to prove three months of full employment, and in some cases, you’ll also be required to obtain a letter of reference from the bank of your home country. Out of Canada income sources may sometimes be used as a substitute for three months of Canadian employment.
Other costs associated with buying a home
Though the 35% mortgage down payment is the largest expense when buying a property, it’s not the only one. There are multiple fees, taxes, and miscellaneous payments associated with buying a home which are collectively known as closing costs.
Land transfer tax is a fee paid to the municipal or provincial government (sometimes both) and the amount depends on the purchase price of your property as well as location. In Toronto, a $500,000 home would have a land transfer tax of $12,950 but you can get a land transfer tax rebate of $8,475 if you are a first time buyer. You should also budget for legal fees associated with preparing and filing the paperwork. This can vary widely and can include other things like a property survey government registration fees, and title insurance but $1000 – $2000 is a good amount to budget.
A property appraisal is usually required by your lender and ranges from $300 – $500. In addition to an appraisal, it’s recommended (though not mandatory) to get a home inspection done which costs around $500. It protects you from any surprises and may save you thousands of dollars down the line.
In a few locations like The Golden Horsehoe Region and British Columbia, there’s an additional 15% tax for foreigners (not permanent resident or citizen of Canada) who want to buy a home. You can get a full rebate of the tax if certain conditions are met. The closing costs vary from location to location and depend on many factors so it may be a good idea to use a closing costs calculator to get a clear idea of how much you may pay. Finally, if you haven’t gotten employment in Canada or don’t have a steady source of income, it’s prudent to budget a few months of mortgage payments.
Buying a home in Canada is possible for new immigrants even if you don’t have prior Canadian credit but the process has a unique set of requirements. Most banks require a 35% down payment, and there are thousands of dollars in closing costs to budget for. When everything is said and done, you’ll need about $200,000 to cover closing costs and the down payment for a $500,000 property.