First-Time Home Buyer Loans

When buying their first home, most people will need a loan from a bank. A first-time home buyer loan, called a mortgage, is gradually paid off over a number of years. Here are some things you need to know about getting a loan to buy your first home:

Types of mortgage: Variable or fixed rates

When you apply for a mortgage, you have the choice of getting either a fixed or variable interest rate. The most popular kind of mortgage is a five-year fixed rate mortgage, which means your rate is set for the first five years of your loan.

As the name implies, fixed-rate mortgages are constant for the duration of the term. There are also variable-rate mortgages, which fluctuate with the bank’s prime rate. The advantage of a fixed-rate mortgage is that your mortgage payments won’t change your rate won’t increase even if the prime rate increases. Because of this, the interest rate on fixed-rate mortgages tend to be higher than variable-rate mortgages. With a variable-rate mortgage, your interest rate will decline if the bank’s prime rate falls. However, if the prime rate increases, so will the interest rate on your mortgage.

Down Payment Rules

A down payment refers to the money a purchaser must pay upfront when buying a home. Typically, the down payment is a much smaller amount compared to the size of the mortgage. Together, the down payment plus the mortgage represent the total value of the home being acquired. Down payments are usually expressed as a percentage of the property value. For example, a 15% down payment on a home selling for $500,000 would be $75,000. The mortgage, comprising the balance, would be 85% or $425,000.

In Canada there are minimum down payments for all property purchases. The percentage you must put down depends on the purchase price of the home:

  • For homes less than $500,000, the minimum down payment is 5%
  • For homes selling for between $500,000 and $1 million, the minimum down payment is 5% of the first $500,000 of the purchase price and then 10% of the purchase price between $500,000 and $1 million
  • For homes with a purchase price of greater than $1 million, the minimum down payment is 20%

The size of your down payment affects the size of your mortgage and whether or not you need CMHC insurance.

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