I have helped hundreds of people successfully navigate from the US to Canada. If you're thinking of moving or retiring to Canada contact me today to chat about your plans.
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Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
Whether you are looking to buy a vacation residence, an investment property, or move to Canada more permanently, there are many factors to consider when looking to purchase real estate in Canada. I will run through the most important criteria below.
Before we get to the nitty gritty, know that Canadian financial institutions, overall, are quite conservative regarding lending. It is very important to understand some basics before starting your search to ensure you are looking first in the appropriate price range, and in the right location.
As I’m sure you may be aware, Canada has two very expensive real estate markets: the GTA, Greater Toronto area, and the GVA – Greater Vancouver area. Yes, your USD goes a long way in Canada, however the average detached house is selling for $1.4M in the GTA1 and $1.9M in the GVA2 at the end of 2021. Not small numbers.
Furthermore, in these specific regions, there are some Governmental measures in place to curb foreign ownership. These measures are financial in nature and are listed at the end of this article. For example, in many parts of the province of BC, where the GVA is located, there is a one-time Foreign Buyers Tax3 of 20% of the purchase price, which may not be financed and will be required to be paid a few days before taking possession of your property. On top of this, there is an annual BC Vacancy tax4, and a Vancouver specific annual Empty Homes tax5 to consider. The Province of Ontario, where the GTA is located, has a one-time 15% Foreign Buyers tax6, like BC.
Of course there are many other areas of Canada that are much less expensive and have no additional taxes levied, outside of your standard ‘closing costs’ which vary from province to province. Plenty of specificity here, so I will leave this information out of this article, however, know that, for example, in BC, you will incur closing costs of about 2.5% of your purchase price a few days before possession. This is on the high side however, and most provinces are more reasonable.
Let’s get into specific mortgage lending rules now. When we review mortgage applications, there are four very important factors that we need to address upfront. As I mentioned above, mortgage lending in Canada has traditionally been considered quite conservative, and in 2022, this continues to be the case. Therefore your 1) down payment, 2) income and 3) credit will be closely scrutinized. Lastly, 4) net worth will play a role, whereby we factor in your assets and your monthly debt obligations which need to be accounted for. I will go through these four factors in detail below.
Before we move any further in the discovery process, it is important to determine if you have the cash or liquid assets required to purchase your desired property. This is a key limiting factor on many of the applications I see. As noted above, you will also need to account for any additional taxes and closing costs, depending on where you are buying, as none of these are permissible to be financed.
Assuming you qualify based on income and/or net worth (which we will get to shortly), and whether you are buying the property as a principal/secondary residence or as an investment property, the down payment will range from an absolute minimum of 20% to a minimum of 35%. It is also important to note that most times, gifted down payment is not acceptable, although a few exceptions are available here.
Also, it is important to note that, depending on purchase price and location, there are limitations as to how much a financial institution will lend you on a specific property. For example, a log cabin a few hundred miles from a major city may only qualify for a loan that is 50% of the value of the property, regardless of your personal qualification. We call this a sliding scale.
Lastly, one rule that is rarely discussed but is of the utmost importance, is that down payment money is required to be deposited into a Canadian financial institution at least 30 days prior to the closing date of your purchase. Note that this is a Federally legislated rule to discourage money laundering, and not one that any specific financial institution has created.
- Principal or Secondary residence – Minimum 20%, but can be 35% depending on qualification
- Investment property – Minimum 35% down payment
- Gifted down payment – can only be from immediate family member, and only with 35% down payment for a primary residence or secondary residence
- Down payment MUST be in a Canadian financial institution at least 30 days prior to closing on the property purchase
- Sliding scale considerations need to be noted
A very high percentage of mortgages in Canada are adjudicated based on your income levels. The most important question the financial institution will ask is, ‘how do you plan on paying us for this monthly cost?’. Banks want to know that you can afford to pay and have a buffer for potential interest rate hikes in the future. We call this the ‘Stress Test’ in Canada, where you need to qualify for your mortgage based on an interest rate of 5.25% or your actual rate plus 2%, if higher than 5.25%. This is the rate at time of writing and is subject to change at any time. This is the Government of Canada protecting its citizens from themselves, capping their prospective purchase budgets based on a potentially higher interest rate in the future. As you can imagine, this was not well received when first implemented back in 2018, nor is it well received by most buyers today.
We will not get into the weeds about specific percentages of income allowable to purchase in this article but know that your income will be scrutinized in a few ways, depending on how you derive income. A few potential document requests being a letter of employment, a recent pay stub, your last two years of W-2’s, your last two years of tax returns, 2 years of investment statements – All may be requested as they are typically looking to confirm income through the collection of multiple documents.
Important to note that you will have a reduced borrowing limit to Canadian Citizens or Permanent Residents in Canada, albeit slight. (The percentage of income you can attribute towards your purchase will be reduced by a small amount.)
Your Equifax credit report will be required by the Bank, in order to assess your creditworthiness. This is typically called your FICO score7 in the US. The Lender will review your credit to ensure that you are current with your payments, and that you have a history of paying your bills on time, that you are managing your credit responsibly, and are not over extended. Being that Canadian financial institutions have very little desire to go after bad debt, especially in another country, ensuring your credit history is very clean provides them with the comfort they are looking for to proceed.
Your financial stability is important to financial institutions. Knowing that there is a ‘fall back’ position should your income stream be disrupted is another important factor that will be considered. Certain exceptions can be made for those with a significant liquid net worth. Know that a comprehensive list of all your assets and liabilities will need to be included on your mortgage application. Any monthly debt obligations will be a limiting factor and deducted from your maximum mortgage qualification, just like they would be in the US.
All real estate transactions in Canada need to be handled by a solicitor, either a lawyer or a notary public, as buying or selling real estate are legal transactions. You will need to meet them in person in Canada typically a few days before the purchase transaction completes. With Covid, some exceptions to this were made by some financial institutions, but best to plan on being in Canada around the time of possession. This should be factored into your decision around possession dates when writing an offer with your realtor. The solicitor will also prepare documents on behalf of the financial institution you are using for your mortgage. Some of the functions they will perform are reviewing your purchase contract, arranging for title insurance,
transferring the property, calculating transfer taxes, among others. They will provide you with a document called a Buyer’s Statement of Adjustments, which outlines all the costs involved. It looks like a rudimentary balance sheet.
When attending your solicitor meeting, the remainder of your down payment and closing costs are due and will need to be in the form of a bank draft. Your solicitor will provide this amount to you in advance of your meeting in most cases.
To summarize, there are many factors at play when looking at purchasing a property in Canada. Knowing the ins and outs around down payment, income, and specific geographical constraints are considerations imperative to a successful and stress-free transaction. It is important to speak with an experienced licensed Mortgage Broker first before you start your search, ideally quite early on, to ensure that all the criteria are met, so there are no delays or surprises when you are under a deadline.
Andrew Homeyer is a BC independent licensed mortgage consultant with XEVA Mortgage. Andrew can be reached via email at email@example.com, via phone at 604-762-7539 or you can visit his website at https://www.homeyer.ca.
- BC Foreign Buyer Tax
- BC Vacancy Tax
- Vancouver Empty Homes Tax
- Ontario Foreign Buyer Tax