Does owning a house in Canada appeal to you? I bet it does.
For many people, the one thing standing between them and their dream purchase of a home in Canada is Money. The Canada Real Estate Association gives the average home price in Canada to be around $500,000. You might not have that amount of spare cash—but what if you could actually afford to make the required mortgage down payment in Canada while also showing the lender that you are able to pay the rest in regular mortgage payments spread over the next 25 years? In this way, you can enjoy the historically low mortgage rates in Canada.
Don’t be so fast to write off your desire to buy a home in Canada. Hear me out.
1. Make a Minimum Mortgage Down Payment
Your down payment depends on the cost price of the house, ranging from about 5% to 20%. For a house that costs about $500,000, you have to make at least a 5% down payment, or $25,000. If the house you’d like to buy costs between $500,000 and $1,000,000, your down payment would be 5% of the first $500,000 and 10% of the remaining payment. And finally, a property that costs more than $1,000,000 requires a minimum of 20% as a down payment.
If you have the capacity, it is better to make a larger down payment than required so you can make smaller monthly mortgage payments. Making a down payment of 20% or higher also excludes you from needing CMHC mortgage insurance; since a down payment of less than 20% for your house produces a higher risk of default on your mortgage payment, it creates the possibility that the lenders will not be able to recover the total mortgage balance, especially if market prices decline. In these cases, the risk is covered by CMHC Mortgage Insurance. But this comes at a cost: you will need to pay between 2.8% to 4% of the borrowed amount in addition to your mortgage.
As an example, if someone wants to buy a $500,000 property with a 5% down payment of $25,000, they will need to take out a mortgage of $475,000. With a 5% down payment, CMHC mortgage insurance will cost 4%, or $19,000. This would be added to the mortgage for a total borrowed amount of $494,000.
Regardless of the amount of your down payment, it is still necessary to show that you can afford the mortgage and be able to pay the regular mortgage payments over time. To calculate your mortgage affordability, you can use the WOWA mortgage affordability calculator which shows your affordability based on calculations from five Canadian banks (RBC, TD, Scotiabank, BMO and CIBC) as well as CMHC. An example of its usage can be seen in the snapshot below.
2. Other costs: land transfer taxes and closing costs
Closing costs include legal services, home inspection, title insurance, government registration fees, and depending on the area, taxes (HST) on your CMHC insurance premium. However, the most significant one is typically land transfer tax which depends on the location of the property. You can use the Canada land transfer tax calculator to find out how much the land transfer tax will be in your area.
For foreign purchasers without permanent residency or citizenship, certain regions in Toronto and Vancouver have an additional tax known as the non-resident speculation tax (NSRT) equal to 15% or 20% of the property value respectively. You may obtain a full rebate if certain conditions are met.
When buying a house in Canada, you should be able to pay the minimum down payment for your mortgage, land transfer tax, and other closing costs. Additionally, it is also important to show the lender that you can afford the mortgage amount.