Are you considering owning a house in Canada in 2022? Then you’ll want to read this guide. In this guide we’ll go over all the things you’ll want to do to prepare yourself for homeownership in 2022. There are a lot of things to consider: home insurance, mortgage approval, closing costs, and more .
Since most homeowners can’t afford to buy homes in cash, you'll need a mortgage. We’ll talk about getting your finances in order to qualify for a mortgage. We’ll also discuss the things to consider when buying a home in Canada in 2022, as well as paying for the home once you own it.
Owning a house and the down payment: the Bank of Mom and Dad
The Bank of Mom and Dad is a term thrown around a lot, but it can come in many forms. It could mean your parents gifting you a down payment so you can own your own house or letting you live at a home rent-free. Let’s discuss both of those forms of assistance from the parent unit now.
It is a gift and not a loan
When people think about financial help from a parent, a gifted down payment is the most common thought that comes to mind. With home prices rising pretty much all across Canada during the Covid-19 pandemic, affording a home has become that much more challenging, especially if you’re buying on your own. That’s where a gift down payment from your parents can come in handy.
The math is simple. Any gifted money you receive is added on top of the maximum purchase price you can afford. For example, if you qualify to spend $500,000 on a home on your own, if you get a $100,000 gift from you parents, you’re able to spend $600,000 in that instance.
It’s important that the funds be a gift and not a loan. Your parents must sign a gift letter to the lender saying that it’s a gift and doesn’t need to be repaid. If it’s a loan, it won’t really help you, as it will need to be added as debt, therefore, you won’t be able to afford to spend more on a property.
And it’s not just your parents who could gift you your down payment. Most lenders are okay with any immediate family member gifting you a down payment. It could be a sister, brother or even your grandparents in many cases.
Cash in on a living inheritance
“Living inheritance” is a popular trend. Your parents or grandparents may have planned to leave you something in their will. However, instead of waiting until they pass away to gift you the amount, they decide to gift it to you while they’re still living, hence why it’s called living inheritance.
Living rent-free for a specified amount of time
If your parents can’t afford to gift you down payment money, another way they could help you out is by letting you live at home rent-free. In some cultures that may already be the norm. Parents let their children live at a home rent-free, in exchange for their adult children letting them live at home in their older age.
The best way to set this arrangement up for success is by setting expectations early on. It should be clear that this is only a temporary living arrangement. Set a deadline. Whether it’s one year, two years or three years, at least you’ll know how much money you’ll want to save over this time period.
Also your parents should be clear that they are only letting you live at home rent-free so that you can save a larger down payment. That way you’re a lot less likely to spend the extra money you could be saving and there won’t be resentment from your parents.
If your parents could also charge you rent, either market rate or below market rate, and gift you some or all of the money later on as a surprise.
There are some potential downsides to accepting gift down payment funds. Mainly, it gives your parents a say in the property you want to buy. You may want to buy a home, however, if you parents don’t like this particular home, it can cause disagreements, so make sure you know what you’re getting yourself into.
Owning a house in Canada: what income do you need?
Buying a home is a large financial commitment, so it’s important to make sure you have a steady source of income to pay the mortgage. If you’re newly graduated, you might wait a few months or a year until you decide to own a house. You want to make sure you’re going to be successful at your new job. So will your lender.
Technically, you can get mortgage financing if you’re four months into a new job and off probation. However, just because you can be approved for a mortgage, it doesn’t mean you should buy a home. You’re probably better off living with parents or renting for the first while. It’s only when you’ve been at your job for a while and you know that it’s somewhere that you want to stay long-term and that you’re going to be successful, that you’ll want to start seriously looking for a home.
If you’re a salaried employee, getting approved for a mortgage is pretty straightforward. All you need is a letter of employment and a most recent payslip. It’s as simple as that. As long as you’re in a permanent position, not contract, and you’re salaried, not hourly with non-guaranteed hours, it’s a pretty simple process when you’re off probation.
On a side note, you may still be able to get mortgage financing when you’re on probation, however, the lender will want to see that you’re working in the same industry in a similar role. If you’re working in a totally new industry, that’s when it can be tough to get financing until you’re off probation.
Getting a mortgage when you are self-employed
If you’re self-employed, you may need to wait a little longer to buy a home. Lenders generally want to see two years of filed taxes before they will approve your mortgage application. The amount of mortgage you qualify for is based on your own personal income after the expenses of the business, not the business’s revenue. It’s important to keep that in mind. You’ll want to pay yourself a high enough salary from your business so that you can qualify for enough mortgage money to buy the home that you’d like to buy.
Owning a house in Canada: Is your credit score good enough?
Besides your down payment and your income, another important factor is your credit itself. A mortgage represents a large sum of money. As such, before a lender is willing to approve a mortgage for you, they want to ensure you have a high likelihood of paying it back. That’s where your credit score comes into play.
Your credit score predicts the likelihood of you making your credit payments on time. A high credit score represents a high likelihood of you paying back borrowed funds on time, while a low credit score means there’s a lower chance you’ll pay back borrowed funds on time.
Generally speaking, prime lenders with the most competitive mortgage rates are looking for a credit score of at least 680 before approving you. You may still be able to get a mortgage with a lower credit score, however, the mortgage rate may be higher and you may need to put more money down.
Getting and maintaining a high credit score isn’t rocket science. Aim to make all of your credit payments on time including credit card, student loan, car payments, etc. For revolving credit, such as credit cards and unsecured lines of credit, if you can’t make the full payment, make at least the minimum payment.
Also for revolving credit, make sure your outstanding balance is less than 50% of your credit limit. Anything higher than that and it will start to pull down your credit score. If you do all of these things, you could have an excellent credit score and be well on your way to a mortgage approval.
Owning a house in Canada: How to choose a property?
Once you have your down payment and that income and credit credit score are taken care of, you can focus on the exciting part: buying and owning a house in Canada. In this section we’ll discuss some things to consider with homeownership, including the property’s location, urban vs. suburban and new or resale.
Location, location, location
It’s often said that the three most important rules in real estate are “location, location, location.” You can change many things about your home; however, the location of it isn’t one of them. If you’re close to a noisy airport or highway, that’s not something you can change. Make sure you are okay with these things before buying a home.
You’ll want to own a house in a location that will work for your family in the short and long-term. For example, if you have kids, you’ll want to buy in a location that’s in a good school district. If you like hiking, you can choose a location that’s closest to the best hiking trails.
Owning a house in Canada: the property type
Property type is another important factor. It mainly comes down to personal preference and budget. You may want to own a house in Toronto or Vancouver, but affording one is a different story.
If you’re buying a home the first time, you may have the choice between a condo or townhouse. If you prefer to live close to downtown, a condo can offer that. Just make sure you’ll enjoy the lifestyle. If you’re looking for more space, that’s when a townhouse can make sense. However, you might have to move a bit further out, so make sure you’re okay with that.
Owning a house in Canada: urban vs. suburban?
Another important decision is urban versus suburban. Are you someone who prefers to live in the city or you would prefer owning a house with a garden in the suburbs. Both areas have their benefits.
The benefit of urban areas is that you have all the best amenities close to you: shopping, entertainment and groceries. You may be able to get by without owning a car. However, you’re likely sacrificing space. Ask yourself if that’s something you’re comfortable with. If it’s not, that’s when you may consider the suburbs.
The suburbs can be great too. You get a lot more space and generally a bigger property. You may be able to afford a townhouse or even the coveted detached house there. If you’re able to work from home, it can be a great arrangement. Just make sure you’re okay with the longer commute downtown.
New or resale
Do you want to own a new house or a resale property? This can come down to personal preference. Sometimes you’ve only ever lived in a new house, so that’s what you prefer. Other times you’ve only lived in a resale house, so that’s your preference.
The benefit of buying a resale house is that it’s right there for you to see and touch. A new house may not be built for two or three years. It’s also possible that it may never be built. Plus you can get home delivery of mail and mature trees.
If you don’t like bidding wars, that’s where new houses can come in handy. With a new house, you can buy it at the list price. You don’t have to go through the typical bidding war that you would with a resale property.
Repairs and maintenance
Once you own a house, you’ll want to budget for repairs and maintenance. If you’re buying a newer home, hopefully you won’t have to worry that repairs and maintenance for several years. However, if you’re buying a resale home, that’s when it’s important to budget for them.
You can do that by saving money on a monthly basis towards them. Why not hold back some of your down payment money so that you have extra money set aside for repairs and maintenance? Otherwise, you can add your maintenance costs to your emergency fund.
At a bare minimum you should at least set up an unsecured line of credit for emergency savings. At least if your basement suddenly floods and it’s not covered fully by home insurance, you’ll have money to be able to repair it.
The easiest way to budget for home repairs and maintenance is to look at the big ticket items of your house. These include the roof, windows, and furnace. You can estimate when you will need to replace them and how much it will cost. That way you’re less likely to be caught without enugh savings.