Home loans for first time buyers in Canada: Everything you need to know

Becoming a homeowner is a dream for many Canadians. Due to market fluctuations and increases in the cost of living, that dream may feel out of reach for many potential buyers. This can be especially true when considering the significant costs of down payments alone, not to mention costs throughout the life of the loan such as your mortgage rate.

But there is hope.

There are home loans and incentives in Canada for first-time home buyers designed specifically to help you climb onto that coveted property ladder.

First, it is important to know what a first-time buyer is and whether you qualify as one. If you do, there are numerous programs out there that can help lower your minimum down payment and the credit score you need to qualify for a decent loan.

Here is an in-depth analysis of the home loan options available for first-time buyers. For the mortgage professionals who frequently visit our site, this is an excellent article to pass along to a new client who was thinking of becoming a first-time home buyer in Canada.

Who qualifies as a first-time home buyer

The basic definition of a first-time home buyer in Canada is a person buying a property who has not previously owned a home and has no property to sell. In other words, first-time home buyers do not own a home, are not an investor, and are not currently mortgaging or re-mortgaging a home.

Who qualifies

While each province has their own definition, the following is a breakdown of who typically qualifies as a first-time home buyer in Canada:

• You must be at least 18 years old
• You must be a Canadian citizen or a permanent resident
• You must occupy the home as your principal residence
• You cannot have owned a property, or a stake in a property, at any time in any part of the world
• Your spouse or common-law partner cannot have owned a property while he or she was your partner

Does the Canadian government help first-time home buyers?

Yes. The First-Time Home Buyer Incentive helps eligible first-time home buyers in Canada reduce their monthly mortgage payments without adding to the buyer’s financial stress. A shared-equity mortgage with the Government of Canada, the First-Time Home Buyer Incentive offers the following:

• 5% or 10% for a first-time home buyer’s purchase of a newly built home
• 5% for a first-time home buyer’s purchase of a resale, i.e., existing, home
• 5% for a first-time home buyer’s purchase of a new or resale mobile or manufactured property

What does a shared-equity mortgage with the Government of Canada mean, exactly? The shared-equity component means that the federal government shares in the upside and downside of the property value alike—up to a gain or loss equalling 8% per year, not compounded, on the First-Time Home Buyer Incentive amount from the date of advance to the time of the repayment.

If you qualify for this incentive, you might not have to save as much money for a down payment to be able to afford the mortgage payments. In other words, if you make a larger down payment, you will have a smaller mortgage—which also equals lower monthly costs.

Another option for first-time home buyers in Canada

Another incentive for first-time home buyers in Canada is the First Time Home Buyers’ Tax Credit, which was introduced in 2009 and gives first-time buyers the chance to recover some of the costs associated with their property purchase. Some of these costs include inspections, legal fees, and closing costs. The First Time Home Buyers’ Tax Credit is non-refundable and was valued at $750 until the 2022 budget, which saw the credit amount increase to $1,500.

How much do home buyers have to put down in Canada?

The size of the down payment necessary to buy a house in Canada can vary widely, depending on the type of home you are purchasing, the size of the mortgage you are taking out, and many other factors. However, if you know how much you need for the down payment, you can better determine if you are financially prepared for the purchase.

In Canada, the minimum down payment is 5% when the purchase price of the home is $500,000 or less. For homes valued over $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remainder.

According to recent data from the Canadian Real Estate Association, the average price for a home in Canada as of January 2023 was $612,204. At that price, the minimum down payment for a home would be $36,220.40. The breakdown looks like this: 5% of the first $500,000 and 10% of the remaining $112,204 equals our minimum down payment.

If, however, you wanted to make a 20% down payment—which is the minimum amount required to avoid paying mortgage loan insurance—you would end up paying $122,440.80.

What credit score is needed for a house in Canada?

Most traditional home lenders require a credit score of at least 680 to buy a home in Canada. However, a good general rule is that the better your credit score, the better off you will be. Why? A solid credit score will ensure the following:

• You will get approved for the mortgage
• You will receive a more favourable interest rate

Credit scores can range from 300 (poor) to 900 (excellent) in Canada. However, anything higher than 660 is generally considered to be a good credit score. Generally, a good credit score indicates that you are at a low risk of defaulting on your mortgage and that you are a good candidate for a home loan. When applying for a mortgage in Canada, a credit score of 700 or higher is considered ideal.

Factors that affect credit score

There are numerous factors that can affect your credit score, which include:

• Credit history: If you have a long credit history, you will be better off when applying for a home loan
• Payment history: Your payment history will indicate to lenders whether you pay your credit card bills on time
• Credit utilization: Ideally, you would use less than 35% of the credit that you have available. Again, favourable credit utilization will look better when you apply for a home loan
• New credit requests: New credit requests mean how recently—and how often—you have applied for new credit cards and new loans
• Types of credit: Having types of credit that are mixed—such as a line of credit and a credit card, for example—is best

If you would like to know your credit score but are unsure, you can get your score from either of the two credit-reporting agencies in Canada, which are TransUnion or Equifax Canada. You can also request a free copy of your credit score every year. To look it up any time, you can check your credit score for a small fee.

As we have seen, there is help there for first-time buyers. Knowing where you stand financially—and how to improve your finances—is a great first step. Remember: there are incentives for first-time home buyers in Canada. You just need to know where to look.

Have experience with home loans for first-time buyers? Let us know about your experiences in the comment section below.