This influx represents one of the highest rates per population of any country in the world.

These newcomers will be looking to navigate the dream of owning a home in Canada. According to REALTOR.ca insights, approximately 40% of individuals currently searching for homes are first-time buyers.

This article lays out the three significant steps to help you become prepared about the purchasing a home in 2024, including:

• Planning out your needs and what you can afford;
• Arranging your finances and mortgage; and
• Selecting a real estate agent

Plan the Requirements of Your First Home and What You Can Afford in 2024

What do you need in a first home?

Homes come in all shapes and sizes, in different neighbourhoods, and with various amenities. Before you even look at potential homes, you need to decide what’s important to you. This is especially true if you’re buying a home with a partner. It’s better to understand each other’s needs and wants now rather than later on in the process. For example, the neighbourhood and school district may be vital if you want or already have children and want to live in a neighbourhood with great schools.

What kind of first home can you reasonably afford?

You should also consider what you can afford when contemplating your needs and wants. You may want 3,000 square feet of space. But such a large home is out of reach for most first-time homebuyers. Areas with high-ranking school districts are also expensive.

Even if you can get an enormous mortgage to purchase the most expensive house available to you, it doesn’t mean you should. A sizeable monthly mortgage payment can hurt your financial and mental well-being in the long term. The Canada Mortgage and Housing Corporation recommends keeping your total housing payment (this includes taxes, maintenance, and mortgage) under 35% of your gross household income.

Arrange Your Finances and Mortgage for Your First Home

Are you financially ready to purchase your first home in 2024?

Buying your first home requires financial readiness. At this point, you’ve likely saved for a downpayment. But are you ready for closing costs such as legal fees and home inspection costs? These costs can amount to 2 – 4% of your purchase price. Further, once you purchase the home, are you ready for property taxes and maintenance expenses on top of your monthly mortgage payments?

It’s also important to understand what tools the Canadian government provides to first-time homebuyers. These tools generally make it easier for first-time homebuyers to make their purchase.

What is your credit score?

The next step is to review your credit score, which determines whether you’re qualified mortgage. It’s handy to find services that can help track your credit score. Many banks offer free credit score estimates without impacting it.

If your credit is on the low side, it’s essential to bring it up. This isn’t something you can do overnight. Raising your score may even delay your first home purchase. But a better credit score can provide you with better mortgage rates and more financial flexibility. If you’re purchasing your first home with a partner, note that lenders consider both of your scores.

How to find a mortgage for your first home

Your mortgage is commonly the largest loan you’ll take out in your lifetime. Therefore, it’s essential to shop for the best one. You’ll likely speak with two types of people in this process: a mortgage lender and/or a mortgage broker.

• Mortgage lenders are most commonly your large banks or credit unions. They lend money directly to you.
• Mortgage brokers don’t directly lend to you but arrange a transaction to help you find a lender. Brokers have access to many lenders beyond the big banks and credit unions — generally referred to as “A Lenders”. They can introduce you to B and C lenders who may be more lenient if you have a less-than-pristine credit score.

Previously this process involved visiting numerous banks and mortgage broker offices. But post COVID-19, this process is more commonly done over video conferencing. When the deal is settled, some lenders or brokers may still require you to visit in person to sign the paperwork.

The interest rate on your mortgage is the most crucial characteristic, but also consider aspects such as:

• Do I need to purchase mortgage insurance?
• What fees do I need to pay if I break the mortgage?
• Are there any penalties if I refinance my home?

Getting your mortgage pre-approved before you begin to look at properties is essential but optional. A pre-approved mortgage can provide certainty in how much you can bid on a house when you find the one.

Find a Real Estate Agent

Buying a home isn’t easy. It’s a lengthy process with complicated steps and procedures. Luckily, real estate agents are here to help. A realtor can match your needs and wants with what you can afford. They can also advise what to look out for in a first home — things you’ve never anticipated. They can address your concerns about the current market conditions, how certain neighbourhoods are, and what red flags to look out for and provide referrals to real estate lawyers, home inspectors, and other professionals part of the home buying process.

A REALTOR® can also do a lot of the in-person work for you during this COVID-era. Suppose you’re afraid of attending a home showing. In that case, many agents may be happy to visit the property on your behalf and show it to you via ZOOM, Facetime, or similar applications.

Once you’re ready to close on your deal, a real estate advisor can help prepare your offer package. This includes your offer price, pre-approval letter, proof of funds for the down payment, and terms and conditions.

It’s also important that you meet with several real estate agents before selecting the one you want to work with. Hiring an agent is similar to hiring an employee. You’ll want to meet with multiple agents and ask questions to understand their credentials. Online reviews are also a great way to differentiate between agents as reviews are written by real clients that have had a full experience working with the prospective agent you are interviewing.

Buying your first home is a complicated and exciting process — especially in 2024. It’s important to plan out what you can afford and what amenities and features that you and your partner need in a home. Arranging your finances and mortgage and finding an excellent real estate agent are also critical to making this process as smooth as possible and turning your homeownership dream into reality.

The post Three Steps to Purchasing Your First Home in 2024 first appeared on RankMyAgent - Trusted resource about Buying, Selling and Renting.

What is a vendor take-back mortgage and how does it work?

A VTB is when the seller of a property also becomes the lender. The seller lends money to the buyer to purchase the property that the seller is offering. This provides the buyer with more access to capital and the seller with an easier sale. The seller, in becoming a lender as well, charges an interest rate that is usually more than what a bank charges but less than what a private lender charges.

For example, if a home is $500,000, a 20% down payment would be $100,000. If you only have $50,000, you could get access to another $50,000 through a VTB. The bank would then provide the remaining 80% or $400,000 to the buyer to purchase the property.

There are a few issues with VTBs. First, the bank has the right to prevent a VTB from taking place. The bank is still a lender, and they can choose not to lend if you are already borrowing from someone else. Second, the seller needs to at least own the amount of equity in the home equivalent to what they’re lending you—i.e., if the VTB is for 10% of the purchase price, then the seller must own at least 10% of the home. Additionally, a VTB is still a mortgage. As a result, putting down 10% of the purchase price with your own funds followed by a 10% VTB won’t provide you enough equity in the property to avoid mortgage default insurance, adding another payment to your home purchase expenses. 

Benefits and precautions to the seller

For the seller, the primary benefit of a VTB is to sell your property. Offering buyers a VTB is a great way to sell in a buyer’s market because it can incentivize a purchase without lowering your offering price. However, if you’re selling your primary home, you’ll still need a place to live. And if you’re not planning to downgrade, you’ll likely need the full proceeds from your sale to purchase a new property. But if you decide to lend the money, you’ll be rewarded with some generous interest payments.

If you sell a $7 million commercial property, there are only so many people in the area who can afford it. A VTB can enlarge your pool of buyers by offering them more access to capital. 

By doing this, there are also tax benefits. When you sell a property that isn’t the home you regularly live in, you must pay capital gains tax. With a VTB, you’re paid out over time which means you defer paying this capital gains taxes over the life of the VTB.

Keep in mind that you and the buyer don’t only have a buyer-seller relationship now, but also a lender-borrower relationship. Therefore, you’ll have a second contract to work out the terms of the lending agreement. This requires that you do due diligence on the buyer to make sure that they’re credit worthy. Your loan will be treated as a second mortgage, which is only paid back after the primary loan (likely the bank’s or private lender’s) is paid out in the event of a default.

Additionally, more agreements mean more lawyers. At least lawyer fees, anyways. Make sure to draft a contract with the buyer to set out the terms of the repayment. A lawyer should help revise this contract and read over the terms and conditions.

Benefits and precautions to the buyer

The ultimate benefit for you as a buyer using a VTB is the additional access to capital. Although you’ll likely pay a higher interest rate than if you borrowed it all from a bank, you may have bad credit or other impediments that prevent you from borrowing what you need.

Another scenario is if you’re purchasing a large investment or commercial property and where a bank may not lend you multiple millions of dollars. Without a VTB, you as the buyer would have to find capital through either investors, who would want equity in the property, or from private lenders, who likely charge higher interest rates than what a VTB offers.

But, for the typical residential property, VTBs are not common unless we’re in a buyer’s market—something rare in Canada’s housing markets

As a buyer using a VTB, you need to remember that this is another loan that you need to pay back. Therefore, it’s part of your monthly interest expenses and an additional liability in addition to any other mortgages you have. And as mentioned prior, the interest rate for the VTB will likely be higher than a bank’s interest rates. 

A VTB is a great tool to add into your real estate purchasing kit. It can help a buyer purchase a property when they can’t otherwise source enough capital to do so. It can help a seller get rid of a property faster, make more money in the long term, and defer capital gains taxes. But, as a buyer, make sure that you can afford what is likely an additional mortgage. And as a seller, double check the borrower’s credit history and make sure you have a contract ready.

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In this article, we explain these tools and look at how they can help you buy a home. The tools include the Home Buyers’ Plan, the new First-Time Homebuyers’ Incentive, and the various tax rebates and credits available to first-time homebuyers.

Home Buyers’ Plan: Borrowing from your RRSP

The Home Buyers’ Plan lets any first-time homebuyer buying or building a home to borrow up to $35,000 from their Registered Retirement Savings Plan (RRSP). This amount used to be $25,000 until March 19, 2019, when it was raised to $35,000. If you’re purchasing your home with someone else, like a significant other, each person can use the Home Buyers’ Plan for a total of $70,000.

Although it mentions “first-time” homebuyers, if you’ve previously participated in the plan, you may be able to do it again if your borrowing balance is 0 as of January 1st of the year. Just remember that every year that the money isn’t in your RRSP is another year that it’s not growing. Without the help of this appreciation, it could impact what you have ready for retirement.

Although withdrawing this money is tax-free, it has to be repaid within 15 years to remain so. The repayment period starts the second year after the year that the money is withdrawn. So funds withdrawn in 2019 have 2021 as the first year of repayment. The tax consequences of not paying back the loan within the allotted time could result in a hefty income tax.

Unlike mortgages and other loans, there are no consequences for paying back the money early.

First-Time Homebuyer Incentive: Sharing Equity with the Government

The First-Time Homebuyer Incentive (FTHBI) started on September 2nd, 2019 as part of the government’s national housing strategy. It’s expected to help Canadians fitting into a specific criterion reduce monthly mortgage payments by $286.

The government does this through a shared-equity mortgage program, where they provide a first-time homebuyer with 10% of the purchase price of a new home, or 5% of a resale home. This capital comes interest-free because it is not a loan. The government is actually purchasing part of the equity.

When the property is sold or after 25 years, the homebuyer must pay back either 10% or 5% of the home’s current market value. Thus, if the home declined in value, the homeowner pays back less than what they got. If the home’s value appreciated, they must pay back more.

For example, a homebuyer purchases a $100,000 new home and receives $10,000 (10%) from the FTHBI. If the home appreciates to $400,000 after 25 years or when they sell, they’ll have to pay back $40,000—10% of the market value after 25 years or at the time of the sale. One big benefit is that this amount can be paid back at any time, meaning you could pay it back when the property market is weaker to maximize the benefit.

As great as it sounds, there are severe limitations to this tool. To qualify for FTHBI, homebuyers must have a combined household income of $120,000 or less. The price of the mortgage plus the incentive amount also cannot exceed more than four times the buyers’ household income. This effectively limits the maximum purchase price of a qualified home to around $500,000. This likely rules out Vancouver or Toronto purchases, as even most condos in these cities have surpassed this maximum purchase price.

Another drawback of the program is that homebuyers using the plan with less than a 20% downpayment still need mortgage default insurance. If you have 10% of the purchase price ready and hope to get another 10% from FTHBI, this won’t help you wiggle your way out of default insurance. The FTHBI is almost like a second mortgage on your home—not part of your down payment.

Tax Rebates and Credits

In addition to tools that can help you get the money you need for a down payment or to reduce monthly mortgage payments, multiple tax rebates and credits can help avoid some of the costs of purchasing your first home.

First-Time Home Buyers’ Tax Credit

The First-Time Home Buyers’ Tax Credit came into effect in 2009. It provides a $5,000 non-refundable tax credit if you and the home you’re buying fit a certain criterion. The credit works out to a maximum of $750 back in your pocket.

To qualify, you and your spouse/common-law partner need to buy a qualifying home and must also have not lived in another home owned by you or your partner in the past four years. You and your partner also get a combined total of $5,000 tax credits. This means that regardless of whether it’s a solo or joint purchase, the maximum tax credit is $5,000.

HST/GST Rebate

The HST/GST housing rebate allows a homeowner to recover the GST or federal portion of HST from the purchase of their home or from any renovations that they made to it. To qualify, this home must be your primary place of residence, among other conditions. Depending on your province, the PST or provincial portion of the HST may also be recoverable.

Land Transfer Tax Rebate

If you’re a first-time homebuyer purchasing a home in British Columbia, Ontario, or Prince Edward Island, you could also recover some or all of the land transfer tax paid on your purchase. The recoverable amount depends on the specific province. The City of Toronto also provides a rebate on the city’s land transfer tax, in addition to the provincial one. The qualifications for each rebate differ depending on the province and whether you’re purchasing in the City of Toronto.

As a first-time homebuyer, many tools can help you purchase your first home. You can borrow from your RRSP through the Home Buyers’ Plan, split the equity of your home with the government via First-Time Homebuyer Incentive, or recover some money through various tax credits and rebates. Make sure to speak to an accountant and your realtor to make the best use of these tools.

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Are you excited to purchase your first home? You should be! It marks the beginning of a new chapter in life and is one of the biggest purchases you will make in life. You should also be excited to know that the federal government introduced the First-Time Home Buyers’ Tax Credit as part of “Canada’s Economic Plan” in 2009 to help Canadians in purchasing their first home. The following link provides more details: First Time Home Buyer’s Tax Credit

Some provinces and cities also have tax credits open to first time home buyers to attract them to their city.

The City of Toronto has a Municipal Land Transfer Tax where first time home buyers may receive a rebate of up to $3,725. More information can be found at: City of Toronto Land Transfer Tax.

The Government of British Columbia and Nova Scotia also offers programs for first time home buyers.

More information can be found at:
First Time Home Buyers Credit- BC and First Time Home Buyers Rebate – Nova Scotia

Canada Wide First-Time Home Buyers’ Tax Credit (HBTC)

A tax credit of $5000 multiplied by the lowest federal income tax rate for the year, is available as a non-refundable tax credit. In 2013, the lowest rate is 15 percent so the HBTC available is $750. This is presently available to all first time owners. The tax credit must be claimed on your income tax under line 369 on your tax return of the year you purchased your home.

Are you eligible?

You must meet the following requirements to be eligible:

• If you are purchasing a home with your spouse, common-law partner or friend, the purchase must be a qualifying home that is registered under either person’s name
• Either person can claim the credit or share it however the combined total cannot exceed $5000
• Any buyer that has not owned a home in the past four years prior to the home purchase for 2013 it would be since 2008
• neither you nor your spouse or common-law partner owned and lived in another home in the year of purchase or any of the four preceding years.

Your home must meet the following requirements to be eligible:

• Located in Canada
• Be an existing or new home
• Be a townhouse, semi, single, mobile home, condo or apartment
• The person applying for the credit must intend to occupy the home within one year of purchase

To find out more: Government of Canada 2018 Budget

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