Buying Your First Home in Canada: What to Know Before You Sign

Buying a home is the largest financial transaction most Canadians will ever make. It involves more acronyms, more paperwork, and more moving parts than almost anything else in personal finance. The good news is that the Canadian government has created several programs specifically to help first-time buyers, and understanding them before you start shopping can save you a significant amount of money.

The First Home Savings Account (FHSA)

The FHSA is the newest and most powerful tool available to first-time buyers in Canada. Introduced in 2023, it combines the best features of the RRSP and the TFSA into a single account designed specifically for home saving.

You can contribute up to $8,000 per year, with a lifetime maximum of $40,000. Contributions are tax-deductible like an RRSP, and withdrawals for a qualifying home purchase are tax-free like a TFSA. If you never use the money to buy a home, it can be transferred to your RRSP without using any contribution room.

If you are planning to buy a home in the next one to fifteen years and you have not opened an FHSA, open one now. Contribution room begins accumulating from the date you open the account, not from the date you contribute. A year of inaction is a year of room permanently lost.

The Home Buyers Plan (HBP)

The Home Buyers Plan allows first-time buyers to withdraw up to $60,000 from their RRSP tax-free to use toward a home purchase. Couples can each withdraw up to $60,000, for a combined $120,000.

The catch is repayment. You have 15 years to repay the withdrawn amount back into your RRSP, starting two years after the withdrawal. If you do not repay in a given year, the scheduled repayment amount is added to your taxable income. The FHSA has no repayment requirement, which makes it the better vehicle for most people saving specifically for a home.

The HBP and FHSA can be used together on the same purchase, which means a couple could access up to $160,000 in combined down payment funds between the two programs.

The Mortgage Stress Test

Canadian lenders are required to qualify you at the higher of your actual mortgage rate plus 2%, or 5.25%. This means even if you can get a mortgage at 4.5%, you will be qualified as if the rate were 6.5%. The stress test is designed to ensure you can still afford payments if rates rise after you buy.

The practical effect is that you may qualify for less mortgage than you expect. Know your stress-tested limit before you start shopping, not after you fall in love with a house.

Land Transfer Tax

Land transfer tax is paid by the buyer at closing and is calculated as a percentage of the purchase price. In Ontario, the rates are graduated: 0.5% on the first $55,000, 1.0% up to $250,000, 1.5% up to $400,000, 2.0% up to $2 million. Toronto has an additional municipal land transfer tax on top of the provincial amount.

First-time buyers in Ontario receive a rebate of up to $4,000 on the provincial land transfer tax, which offsets the full tax on homes up to roughly $368,000.

The True Cost of Homeownership

The mortgage payment is only part of the cost. Property taxes, home insurance, utilities, maintenance (typically budgeted at 1% of the home value per year), and eventual major repairs all add up. A $600,000 home with a $450,000 mortgage might carry $3,200 in monthly mortgage costs plus another $1,200 or more in property tax, insurance, and maintenance. Budget for the full cost before you calculate how much home you can afford.

Freehold Financial Planning is an advice-only, fee-for-service financial planning practice based in Windsor, Ontario, serving clients across Canada. This article is for educational purposes and does not constitute personalized financial advice.