How to get a mortgage as a newcomer to Canada

For most people, the most crucial step in the home-buying process is when it’s time to get a mortgage. This transforms home ownership from a dream to a reality.

Read on to find out everything you need to know to get a mortgage as a newcomer to Canada.

Understand the current real estate market

While your finances, credit record, current debt load, and even residency status all impact your ability to purchase real estate, there are other external factors. The current state of both the national and local real estate markets where you want to buy also impacts your purchasing power.

Right now, many signs point to real estate prices dropping by as much as 25% by the end of 2023. The volume of real estate sales fell by more than 18% between February and June of this year, with many people choosing to hold off on purchases due to inflation and the higher cost of living.

If you have the funds in cash to buy and are looking in an area that still has a high volume of available property, this could work out in your favour. However, if the value of your investments has gone down or your day-to-day costs have risen, it may seem trickier to turn your homeownership dreams into reality, at least for now.

Important mortgage-related definitions you need to know

As you start to think in more detail about homeownership, you may find yourself faced with terms you don’t understand. Here’s a quick glossary of important terms you need to know as you work toward getting a mortgage as a newcomer to Canada.

Mortgage loan

A mortgage loan is a type of loan that is used to purchase real estate. Along with a down payment, a mortgage loan is what makes it possible to bid on and buy a home.

A conventional mortgage loan is one that is paired with a down payment of 20% or more of the purchase price of the property. If you do not have 20% to put down, you can get a mortgage loan with as little as 5% of the purchase price as a down payment. However, this loan must be secured by mortgage insurance.

Amortization

Amortization is a term that simply means the process of reducing or paying off a debt with regular payments. In Canada, a typical mortgage amortization period is 25 years.

Term

In Canada, mortgage amortization periods are split up into several terms. Typically, terms are five years, but they may be longer or shorter depending on your situation. At the end of each term, the interest rate for your mortgage loan is recalculated and a new contract is signed.

Mortgage payment

This refers to the amount borrowers will pay to repay their mortgage. Most mortgage payments occur once a month, or every two weeks if you choose an accelerated repayment schedule.

Interest rate

The interest rate refers to the amount of interest you will be charged on your mortgage loan. Different lenders can offer varying interest rates. In Canada, there are two types of mortgage interest rates:

• Fixed interest rates stay the same for the whole term of your loan.
• Variable rates fluctuate as the Bank of Canada’s key policy interest rate changes (which directly impacts the prime rate of your lender).

Fixed rates may be higher, at least at the beginning of a term, but are more stable through the term. Variable rates may seem more advantageous at the outset, but how much you pay on a variable rate depends on the market over time.

Do you meet the criteria to buy a home in Canada?

Once you understand the current real estate market and important terms, the next step in your journey to getting a mortgage as a newcomer to Canada is analyzing whether you and your family meet the criteria to buy real estate.

Each financial and mortgage loan institution has different residency criteria for its borrowers. You may need a permanent status in Canada, or other proof of your personal and financial ties to Canada.

In addition to providing proof of your status, you will also be asked to demonstrate that you have:

• A good credit score from a Canadian credit bureau,
• A credit history with no red flags,
• A Canadian bank account
• Proof that your debts are manageable compared to your income and savings (debt ratio).

All this documentation should be collected and kept in an easy-to-access location so that it can be quickly provided to banks and mortgage loan officers.

You will also be asked to prove that you have enough money available for a down payment. While paying 20% of the purchase price as a down payment used to be standard, there is now mortgage insurance that can cover borrowers who put down anywhere from 19.5% to 5% as a down payment. This money should be readily accessible, in your possession, and traceable – even if it was a gift.

Request mortgage pre-approval

If you have your documentation and down payment ready, the next step on your home-buying journey is getting mortgage pre-approval. This is a document from lenders that shows sellers that you have been ‘pre-approved’ for a mortgage from their institution. It’s helpful in a few ways:

• It lays out exactly how much you can afford to borrow
• It locks in your interest rate for between 60 and 120 days.
• It shows sellers you are serious about purchasing, giving you more negotiating power.

Get in touch with real estate brokers

It’s hard to navigate the complex real estate market on your own. Why not work with a real estate broker who can help? Ideally, these professionals are familiar with your local market and can help you find the right house and navigate the buying process. Most real estate brokers have access to listings from professional listing services, making it easier to find properties that fit all your criteria.

How are real estate brokers paid?

Usually, real estate brokers are not paid up-front. Instead, they are paid 2% to 6% of the commission included in the sale of the house. The seller usually pays this fee, although the buyer may be responsible for other expenses like property inspections and legal fees.

What other costs can you expect?

The best way to ensure you aren’t surprised by any of the fees or costs that come up on your home-buying journey is to do your research and make a budget.

There are a number of fees you can expect to pay as part of the process, including:

• Insurance
• Taxes
• Independent property inspection fees
• Moving expenses

These can add up quickly, and without a budget it’s easy to get overwhelmed.

Speak to your mortgage lender or advisor, and ask about these potential fees in advance. Then, once you understand what to expect, make a budget that includes all possible costs. You’ll be grateful you were prepared if something unexpected comes up.