The First-Time Home Buyer Mortgage

Buying

March 25, 2025 (2 mins read)

Many people are struggling to buy their first home, there are certain factors and incentives that you should consider before buying your first home. In this guide, we’ll discuss all the key terms, first-home buyer programs, and all other key factors you’ll have to deal with. You’ll get to know all the mortgage terms and clearly understand the concept, which will help you see this as a starting point and buy your first home easily without any hassle.

What is a First-time home buyer mortgage?

This type of mortgage is intended for first-time home buyers offering lower down payment and special financing options.

This kind of mortgage offers special financing options and requires a lower down payment, making it ideal for first-time homebuyers. There are incentives, mortgage options available, and programs that make it accessible for people to buy their first homes.

There are some key terms you should know:

What is a mortgage?

It is a loan that someone can use to buy property that acts as a security for their loan payment.

In Canada there are mainly two types of residential mortgages:

1. Standard charge mortgage

This type of mortgage also referred to as a “conventional mortgage” does not include high ratio security. Also, your lender may file a lawsuit using the details you have on file at the land registry office for specific terms/conditions.

2. Collateral charge mortgage

Your lender requests a collateral charge on your mortgage, a type of mortgage that lets your lender secure more money than your actual mortgage amount, that you may need in the future.

Downpayment

A down payment is the first, non-refundable amount paid upfront when you buy a home. A loan from a bank or other financial institution is used to cover the remaining amount. The lender feels assured because the buyer is paying a portion of the purchase price upfront.

A down payment is where home buyers pay 5 to 20 percent of the buying price.

When applying for a mortgage, having a high net worth lowers the risk for both you and the lender. It also helps when making adjustments to your budget and cash flow.

Your down payment size determines the loan-to-value (LTV) ratio, which is a crucial factor in determining mortgage rate pricing for insured or insurable lending conditions. It also indicates whether mortgage default insurance is necessary.

Who qualifies as a first-time home buyer in Ontario?

Before taking any action, confirm that you qualify for the first-time home buyer incentives. A person who has never owned a home in Ontario or anyplace else on the globe is considered a first-time home buyer. Also, the Ontario government will not classify you as a first-time home buyer if your first residence was a gift or inheritance.

Required downpayment for buying a house

With a 5% down payment, you are eligible for the best mortgage rate.

You won't receive the best rate if you put down 20% or more.

To receive a somewhat better rate than 20%, but still not as favorable as with less than 20%, you must put down 35% or more.

Take a Canadian mortgage stress test, if you have a lower stress-tested mortgage payment and a lower mortgage rate, you can qualify for more than you would with a higher rate.

Understanding Mortgage Rates As A First-Time Homebuyer

A common mistake first-time home buyers make is they only focus on the lowest interest rate. A low rate seems appealing, it may come with limitations or high penalties if you move or refinance within a few years. It might be a good deal but you end up costing more. If you lock into this one you will face high penalties, if you need to end it early.

There are certain factors that you must consider:

Prepayment options allow you to change frequency, increase payments, or add lump-sum payments to pay the loan faster.

Having prepayment flexibility is beneficial.

Always look for payment methods you can use annually without extra charges(penalties).

With a portable mortgage, you can move your existing mortgage from the property you're selling to the one you're buying on the same terms and with the same lender, including your interest rate, without paying extra charges. This Mortgage porting is common in Canada.

Mortgage key terms

Fixed Rate Mortgage

It’s a type of mortgage in which your loan remains fixed over the entire term. The price of the 5-year government bonds has a direct impact on the fixed mortgage rates set by lenders.

When the bond yield increases and the value falls, the banks raise the rates on fixed mortgages to compensate for the fixed mortgage. In a similar way, bank-fixed mortgages decline when the bond yield declines.

You don't have to worry about it until you come for the renewal at the end of the mortgage term, though, as that doesn't apply to your mortgage.

Variable Rate Mortgage

This kind of mortgage is one where the interest rate for the borrower fluctuates. The variable rate is determined by a fixed discount from the prime rate offered by your lender at the time of mortgage commitment. Lenders follow the prime benchmark rates as the Bank of Canada’s target overnight policy. When the Bank of Canada modifies its policy, the lenders change their policy rate too.

Mortgage Term

The duration of your mortgage contract is also known as Mortgage Term. In Canada, mortgage periods can last for five years. Your borrowing requirements determine the exact mortgage rate.

Principal and interest are included in the payments, which are determined by Amortization.
Because they are often lower, shorter-term rates are becoming more and more common.
For FTHBs, longer-term rates are beneficial because they provide them more time to make financial adjustments.
The best mortgage is more than just the lowest interest rate; think about your long-term financial goals.

Amortization

It is a process in which you pay off your loan monthly over the mortgage term. This is the simplest way.

A longer amortization period lowers your mortgage payment.

A shorter amortization period saves you money on interest over the entire loan term.

For the two identical mortgages, but different amortizations, the longer amortization will cost you more interest over loan time.

Open vs Closed Mortgages

Open Mortgage:

The flexibility to repay all or some part of your loan anytime during the loan term, without any prepayment charges. You can renegotiate at any time.

Because of the prepayment flexibility, the interest rate is typically greater than on a closed mortgage.

When you can use this: If you want to sell your property right away and plan to pay off your entire mortgage soon.

There is no penalty for ending the mortgage term early.

How you can qualify for the open mortgage: Pass Canada’s mortgage stress test.

Closed Mortgage:

A closed mortgage limits the ability to make prepayments.
This cannot be renegotiated, prepaid, or refinanced before the term ends.
Compared to the open mortgage, the interest rate is lower.
Certain closed mortgages give prepayment benefits, such as the ability to pay a specific percentage annually without facing prepayment penalties.
If you end the mortgage term early, you have to pay a penalty. Usually, the lender uses the larger 3-month interest strategy that you may find in your mortgage agreement.
How to qualify for this: Pass the mortgage stress test.

Criteria to Qualify for a First-time Home Buyer Mortgage:

Income Criteria:

Before applying for a mortgage as a first-time home buyer, you must meet the requirements listed below:

1- You must be employed full-time in Canada for at least three months.

2-Your income may be sufficient to qualify you for a mortgage if you work on an hourly basis as long as your weekly hours are guaranteed or if your employer pays you a salary.

3- Those who have valid work permits or permanent residency in Canada can buy a home. You do not have to be a citizen to qualify for a mortgage.

4- The majority of first-time home buyer mortgage programs do not apply to self-employed individuals.

5- You can purchase a home in Canada if you have two years of tax filing history and a down payment of at least 20%.

Down Payment Criteria

If you want to buy a property in Canada, you can get a mortgage with as little as 5% down payment.

If the buying price is $500,000 or less, you only need to pay at least 5% down payment.

You must have a down payment of at least 5% of the first $500k and 10% of the buying price over $500k if the purchase price is between $500,001 and $999,999.

Canada's minimum down payment rules:

5% for $500,000 worth home
10% for homes worth between $500,000 and $999,999
20% for homes worth $1 million

Example A: a down payment of at least $22,500 is required if you buy a house for $450,000.

Example B: a down payment of at least $65,000 is required if you buy a house for $900,000.

You can use your savings or the money that comes from selling your property to cover the initial 5% of your down payment.

You are not allowed to make your down payment with borrowed money. For more than a 5% down payment, you can use a gift from an immediate family or corporate firm.

Example: If you choose to put down $65,000, the first $25,000 of a $900,000 home must come from your own resources. The remaining $40,000 may come from a gift.

Credit History

If you have no credit history, it would be difficult for you to get approval for mortgage.

If you’re new in Canada, you may lack a credit history. Your credit profile needs to be updated with more information that will help banks and lenders decide if you can qualify for a mortgage.

You can buy a home without a long Canadian credit history as a first-time home buyer.

If your down payment is between 5% to less than 10%, you need either:

1. An international credit report (Equifax or TransUnion)

OR

2. Alternative proof: a year's worth of rent payments along with auto insurance records or utility bills.

For a down payment over 10%, you can provide either six months of bank statements or a reference letter from a recognized financial institution.