Common questions homebuyers ask about real estate and mortgages

For most people, buying a home is likely the largest purchase of their lives. It’s a major financial commitment with a side of significant emotional investment—two things that often come with a certain degree of uncertainty. For first-time homebuyers, it’s also a completely new experience, and the process can be confusing (and perhaps a little daunting). Even seasoned investors who are looking to grow or improve their real estate holdings may hit unfamiliar roadblocks along the way.

But it doesn’t have to be so intimidating. With help from our friends at Scotiabank^®, we’ve created a detailed guide to help answer some of the most frequently asked questions about purchasing real estate. From tips for determining affordability to how to pay your mortgage down faster, we’ve got the answers you need.

First things first: figure out what you can afford

Once you decide to buy a property, it can be tempting to jump right into looking at listings and attending open houses (that’s the fun part, right?). But falling in love with your dream house before you know if you can afford it may lead to heartbreak. “If you’re looking to buy a home for the first time, it’s critical to know what you can afford,” says Tracy Gomes, senior vice president of real estate secured lending at Scotiabank. “This is so important to figure out before you start looking in your price range.”

To determine your budget, the Canadian Mortgage and Housing Corporation (CMHC) recommends you start with detailing your monthly housing costs. Your mortgage principal and interest, taxes and utilities should not exceed 32 to 39 per cent of your monthly gross household income.

You also need to consider your other obligations, such as fixed expenses and debt repayment, as well as your lifestyle. If you’re someone who hopes to travel, wants to take on home renovation projects or has expensive hobbies or activities, for example, looking for a home that meets your budget is probably for the best.

Next, you need to look at your available savings for a down payment. If your potential home costs $500,000 or less, you’ll need a minimum down payment of five per cent. If your home costs more than $500,000, you’ll need a minimum five per cent down payment on the first $500,000, and 10 per cent on the remainder. For houses with a price tag of $1 million or more, you’ll need a minimum of 20 per cent.

There are also a number of less obvious costs to build into the budget. Things like property appraisals and inspections, land transfer tax, legal fees and, if applicable, mortgage insurance premiums and sales tax, must all be considered. It’s important to remember the additional costs that come with your new home, too, from hiring movers to get you in the door of your new home to any immediate improvements you intend to make once you’re there.

Getting pre-approved for a mortgage

After establishing what you can realistically afford, the next step is to get pre-approved for a mortgage. “Contact one of the 4,000 advisors we have across the country or meet up with a home financing advisor who can help you put together your pre-approval amount,” says Gomes. “We also have an online platform called eHOME, where you can input all of your details and apply for a pre-approval confirmation letter¹.”

Scotiabank and other potential lenders will consider a number of factors when determining if you are a good candidate for a mortgage, including the four Cs. “The ‘four Cs’ include the person’s ability to pay, or capacity; their credit history; the value of their home, or the collateral; and how much savings, or capital, that person has,” says Gomes. A borrower must be on solid footing in each of these areas in order to be pre-approved—and ultimately approved—for a mortgage.

Lenders will also put applicants through the Canadian mortgage stress test. This was introduced by the Office of the Superintendent of Financial Institutions (OSFI) in 2018 as a way to ensure that potential borrowers are able to afford their mortgage payments and avoid taking on too much debt. This test requires lenders to calculate whether or not the borrower can afford the interest rate they are approved for, plus two per cent or a 5.25 per cent rate—whichever is higher. Stress tests are also required for anyone who is looking to refinance their home.

Know your mortgage options

There are a number of different types of mortgages available in Canada, but the biggest buzzwords you’ll hear are “fixed” and “variable.” A fixed rate mortgage is one in which the interest rate stays the same for the entire term of the loan, and it can provide added peace of mind knowing the payments will always remain the same.

In most instances, variable rate mortgages will change with the country’s financial climate. When interest rates rise, more of your monthly payments could be going towards interest rather than the principal amount. You could even end up in a situation where you’re only paying interest, adding to the overall cost of your home.

Scotiabank offers an alternative option through its variable rate mortgage. If you hold a variable rate mortgage with Scotiabank, the interest rate and payments on your mortgage will adjust as the Bank of Canada rate or the lending rate changes. While your payments may fluctuate throughout the life of your mortgage, this option can help you to stay on track with your mortgage schedule. Scotiabank is one of the “Big Five Banks” in Canada to structure its variable rate mortgage this way, which can help you stay on track with paying down your mortgage while taking advantage of decreasing mortgage payments when interest rates come down.

There are also hybrid or combination mortgages that split your mortgage into portions that have fixed and variable rates.

Once you’ve decided on the type of mortgage you’d like, you should also calculate the ideal amortization period. This is the amount of time it will take you to pay off your mortgage in full. The longer the amortization period, the lower the payments. However, you will also accrue interest for as long as it takes you to repay the loan.

Scotiabank is here to help

Homebuyers need tools and advice they can count on to help them plan and make decisions every step of the way. Scotiabank’s advisors are equipped to help with everything from smart saving options for your down payment to guidance on paying your mortgage down faster.

In the early stages of the homebuying journey, Scotiabank offers the First Home Savings Account (FHSA), which is a registered savings account to which first-time homebuyers can contribute up to $8,000 a year, with a lifetime limit of $40,000 per taxpayer. Combined with the Home Buyers’ Plan, which allows people to withdraw up to $60,000 from their RRSPs for a home purchase,² this can be a very sensible way to access funds for a down payment.

To help you with all the facets of your financial plan, Scotiabank provides solutions that look at more than just your mortgage. Scotiabank Mortgage+ is a customizable banking bundle that gives you access to a preferred mortgage rate. The banking bundle includes the Scotia Total Equity^® Plan (STEP) Mortgage³ and an eligible everyday banking account, plus your choice of another eligible banking product such as investments, insurance, credit cards and more. This program is available to all existing and new clients, whether you are buying a home with a new STEP mortgage, moving a mortgage from another bank or refinancing your Scotiabank STEP mortgage.

To support your financial goals big and small, Scotiabank also offers a variety of digital tools and resources, including Scotia Smart Money by Advice+⁴, a digital money management feature to help track your spending, create a budget and get personalized insights. To help reach your financial goals faster, Scotia Smart Investor via Advice+ is a digital platform designed to set, track and manage your financial goals as your life evolves. You might be surprised at how quickly you’re able to save for a down payment with these dynamic options.

After making your home purchase, the focus then shifts to being mortgage-free faster. Scotiabank offers a number of ways to help you achieve this, including speaking with an advisor to learn more about lump sum prepayments. Your Scotiabank advisor will help you to make decisions with your overall financial picture and long-term goals in mind.

You can also leverage digital tools such as the Scotiabank Mortgage Prepayment Calculator, which provides match-a-payment possibilities and ways to adjust your payment schedule to put more toward your principal balance, and the Scotiabank Mortgage Calculator, to help determine your monthly payments and ways to help you save more on your mortgage.

“Don’t be afraid to ask for help. Our advisors can help you to break it down to understand your unique situation and make sure there are no surprises,” says Gomes. “Scotiabank can help to create a customized plan not only for setting up your mortgage appropriately but also with your overall financial future in mind.” In short? At Scotiabank, they’re here to help walk you home.

^®Registered trademark of The Bank of Nova Scotia

¹All mortgage applications are subject to meeting Scotiabank’s standard credit criteria, residential mortgage standards and maximum permitted loan amounts.  Switch applications in Quebec cannot be completed through eHOME. Please visit here to find out about our other switch offers.

²HBP will continue to be available, under which an individual may withdraw up to $60,000 tax-free from an RRSP to purchase or build a home, on the condition that amounts withdrawn be repaid to the RRSP over a period not exceeding 15 years. First-time home buyers who withdraw money from their RRSPs between January 1, 2022, and December 31, 2025, will have five years instead of two to begin repayments over a period not exceeding 15 years.

³Available on Scotia Total Equity^® Plan (STEP) mortgages (including refinanced STEP mortgages) only with pre-authorized mortgage payments set up from an eligible Scotiabank bank account plus customer must have or open one other eligible Scotia product. Not eligible for mortgage renewals, restructures, or pre-approvals. Additional conditions and exclusions apply. Contact a Scotiabank Home Financing Advisor to learn more. This Program may be changed, withdrawn, suspended, or extended at any time without notice.

⁴To access Scotia Smart Money by Advice+, you must have an active personal banking retail product, have transacted at least once on your account within the preceding 6 months and have logged into the Scotia Mobile Banking App.