How to Buy a House in Alberta 2023
What You Should Know
- There are multiple steps before you can search for a house.
- There are many down payment assistance programs to help you buy a home.
- Pre-qualify for a mortgage before making offers.
- Closing costs often surprise homebuyers; be aware of them in advance.
- Always compare multiple real estate agents to find the best one for your needs.
Anti-Flipping Tax Measure
When purchasing a property and selling it at a profit, it is typically classified as a capital gain, which is subject to a 50% inclusion rate. This means that the tax on the money earned as capital gain is only half of what it would be if it were considered business or employment income. However, if the property in question is one's primary residence, it would be exempt from capital gains tax.
Starting from the tax year 2023 and onwards, if a property is held for less than 1 year, any profit from its sale would be treated as business income. As a result, individuals who engage in house flipping would be taxed at their marginal tax rate on the profits generated. In previous years, flippers had the option to designate the house as their principal residence to avoid taxes on their flip profits, or they would be subject to a 50% tax rate due to the capital gains inclusion rate.
How to Buy a House in Alberta 2022
Buying a house is one of the most important decisions you can make in life. It's never too early to start your search for buying a home in Alberta! Consider these steps before buying!
It's vital to think carefully before getting into the procedure and committing to the home buying adventure. This might include:
- Comparing the financial differences between renting vs. owning
- Saving for a downpayment and budgeting for expenses throughout the process
- Understanding the ups and downs of buying a home
Step One: Saving for a Down Payment
Before you can even think about purchasing a house, it's best to make sure you're in a stable financial position. Through CMHC mortgage insurance, Alberta homebuyers can have a minimum 5% down payment for houses under $500,000. However, CMHC requires a 10% down payment on any value between $500,000 and $1,000,000. CMHC is not applicable for houses over $1,000,000, so you need a 20% down payment. The most common ways to finance your down payment include TFSA investments (within your TFSA contribution limit) or the RRSP Home Buyers’ Plan. You can also use a down payment calculator to determine how much savings you need.
CMHC Mortgage Insurance
According to Canada’s laws, homebuyers with a high-ratio mortgage (less than 20% down payment) must obtain CMHC mortgage insurance. This is a federally mandated default insurance that will protect your lender if you stop paying your mortgage. Your CMHC fees decrease as your down payment percentage increases. The fees are added to your total mortgage balance. However, to qualify you must ensure you meet CMHC rules. You can also use a CMHC mortgage insurance calculator to determine your costs. Lenders have the option to extend mortgages with loan-to-value (LTV) ratios up to 80% without requiring mortgage default insurance. This is particularly true for properties in urban areas where finding a buyer for the collateral (house) in case of default is relatively easier. However, for properties in rural areas, the expected time on the market may be longer, prompting lenders to request default insurance even with a 20% down payment.
What we have explained is for residential mortgages only. If a rural house has a large acreage and looks like a farm and the buyer intends to grow crops or raise livestock, they would need 50% down payments. Even if you do not intend to farm your acreage, you can use a residential mortgage only for the residential part of the property. For larger properties, many lenders would instruct the appraiser to value only the main house, one garage and at most 10 acres of the land. So that the residential mortgage would only finance the residential part of the property.
High vs. Low-Ratio Mortgages
A high-ratio mortgage means you have less than a 20% down payment. This is opposed to a low-ratio mortgage - otherwise known as a conventional mortgage - which has a down payment of 20% or more.
Although a conventional mortgage costs more upfront, it will save you thousands of dollars in interest payments and CMHC fees. If you are having a hard time finding money for a conventional mortgage, you may benefit from one of the down payment assistance programs mentioned below.
Alberta Down Payment Assistance Programs
If you have a hard time saving for your down payment, you can receive down payment assistance. However, most of these programs are designed for first-time buyers. These are federal, provincial, and municipal programs designed to help you:
| Name | Description |
|---|---|
| Federal RRSP Home Buyers Plan | This allows you to withdraw up to $35,000 tax-free from your RRSP to contribute to your down payment. |
| Federal First Time Home Buyer Incentive | A shared equity mortgage where the government lends you 5-10% of your fixed home value. However, because it's fixed, the amount you have to repay increases with your home's appreciation. |
| Federal GST or HST Rebate on New Homes | This allows you to receive a rebate for taxes paid on new or significantly renovated homes. |
| Alberta Public Essential and Key Program (PEAK) | Provides low-income earners with a maximum loan of up to 5% of their home's value. |
| City of Edmonton Edmonton First Place Program | Provides first-time homebuyers with a five-year deferral on land costs. |
| City of Calgary Attainable Homes | A shared equity mortgage where homebuyers can receive property for a minimum down payment of $2000. |
Step Two: Building Credit Score & Income Stability
Alberta mortgage lenders want to ensure your ability to make mortgage payments. There are two initial variables they review. To appear as a reputable borrower, you must:
- Have a credit score of over 600: Having a good credit score is crucial for receiving a mortgage. It demonstrates you have substantial financial habits. Additionally, a higher credit score can provide you with access to more lenders and better interest rates. If you have a poor credit score then you may need to work with Alberta private mortgage lenders.
- Have income stability: Owning a home means you are responsible for all expenses. This includes costly maintenance, home insurance, and Alberta property taxes. You can apply for home insurance quotes online in minutes. Mortgage lenders want to ensure you have a stable income to account for unexpected costs. Those who require a self-employed mortgage should set aside an emergency fund.
How to Build your Credit Score
Building your credit score is a long process. You must demonstrate consistently healthy financial habits over an extended period. Additionally, a quick mistake can send your score tumbling. There are free ways to check your credit score in Canada. To improve your credit score, make sure to:
- Avoid late payments
- Keep outstanding debt below 35% of your credit limit
- Maintain a good credit history
- Limit hard inquiries
Step Three: Check Maximum Affordability
In addition to your down payment amount and credit score, there are a few variables that determine your maximum mortgage amount:
- Gross income, before income taxes.
- Gross Debt Service (GDS) Ratio: The percentage of your income spent on housing-related costs (mortgage payments, property taxes, heating costs). This can't exceed 39% of your gross income.
- Total Debt Service (TDS) Ratio: Similar to GDS, but also accounts for all other debt obligation payments (student loans, car loans, spousal support). This ratio can't exceed 44% of your gross income.
In addition to your down payment size and credit score, these three factors are the most important considerations for mortgage lenders. You will be subjected to a mortgage stress test to determine if you can handle a rise in interest rates. A stress test will evaluate your financial stability with a mortgage interest rate of the higher of 5.25% or your current rate plus 2%. If your debt service ratios are still below the threshold after a stress test, you have passed.
The quickest way to find out your maximum mortgage is to use a mortgage affordability calculator. In addition, while it's essential to understand how much you can afford, you must also determine if you feel comfortable with the payments.
Step Four: Locating a City & Neighbourhood
After building your homebuying foundation with the last three steps, you can now begin to narrow down on locations where you want to buy. For example, is it vital for you to live near the Edmonton River Valley, or do you want to be closer to work in Calgary? Some buyers looking to buy a home in Calgary may even read housing market reports such as our Calgary housing market report and the Edmonton housing market report.
| Calgary | Edmonton | Red Deer | |
|---|---|---|---|
| Description | Calgary is home to the Stampede every July. It's a bustling metropolis with numerous skyscrapers and owes much of its growth to being the country's oil capital. | Edmonton is Alberta's capital. It's located on the North Saskatchewan River and towards the centre of the province. | Red Deer is located halfway between Calgary and Edmonton. It's known for the Red Deer Museum which shows First Nations art. |
| Median Home Price | $487,000 | $357,250 | $334,000 |
| Population (5-year growth) | 1,611,000 (12.11%) | 1,519,000 (11.61%) | 108,564 (4.34%) |
| Median Property Tax (Rate) | $3,782 (0.740680%) | $3,614 (0.958920%) | $3,294 (0.996330%) |
| Estimated Cost of Living (Monthly) | $2,962 | $2,288 | $1,996 |
| Walkability Score | 39 | 40 | 22 |
| Recommended Neighbourhoods |
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Some important neighbourhood considerations should include:
- Schools: Many young families and parents want to ensure their children go to a good school.
- Commute to work: Consider how your neighbourhood will affect your daily commute. Is your community close to a train or subway station, or will you need to drive to work? Will you need to buy an additional car for your family?
- Urban vs. rural: Urban homes provide more amenities, but they are typically more expensive. However, rural towns could be farther from work, family and friends. You may also enjoy parks and nature trails which cities don't offer.
After determining the features you want in a neighbourhood, you can compare locations. If you discover the communities aren't meeting your criteria, you may want to broaden your range of locations.
Step Five: Estimating Closing Costs
A good rule of thumb when buying a house in Alberta is to budget 3-4% of the purchase price for closing costs. Closing costs are additional out-of-pocket expenses you must pay when finalizing a real estate transaction. They are one-time fees that can't be added to your mortgage. As such, you must make sure to have sufficient cash to complete the deal. Typical closing costs include lawyer fees, home inspections, and taxes. You can use a closing cost calculator to estimate and budget accordingly. In Alberta, there is a lack of land transfer taxes which is typically one of the highest closing expenses.
Step Six: Mortgage Pre-Approval
Always obtain mortgage pre-approval before searching for homes because it allows you to close a deal quickly. Pre-approval acts as a written contract between your lender that will enable you to lock in an interest rate for up to 130 days. Additionally, pre-approval helps you determine your maximum mortgage and monthly payments. Also, make sure to have the required mortgage approval documents to speed up the process.
Getting the Best Mortgage Rate
Receiving pre-approval from one lender doesn't stop you from shopping around for the lowest mortgage rates in Alberta. Ensuring you have the lowest rate can save you thousands of dollars in monthly interest costs over your mortgage period. Working with a mortgage broker is an excellent method to find the best mortgage for your situation. Their industry knowledge and connections can help you access mortgages that are unavailable to the public.
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Step Seven: Find the Best Real Estate Agent
Finding a home is one of the most important purchases of your life; make sure you are doing it right. It's best to connect with an agent that has a deep understanding of your market. First-time buyers especially should work with an experienced agent to minimize mistakes. You can use our guide on finding a real estate agent to know what to look for.
Step Eight: Research Properties in your Price Range
Although it's tempting to broaden your search and increase your budget, it's critical to keep looking for houses that you can both afford and picture yourself living in. This hunt begins online, with sites like MLS and what your real estate agent discovers to show you. Real estate agents value properties using a comparative market analysis.
When reviewing properties, it's essential to have a list of "must-have" and "nice-to-have" features. This will help you communicate with your agent to find the best properties for your needs. If you can't find homes that meet your criteria, you can always change your search.
Step Nine: Making Offers
Lately, the real estate market has been very competitive. Many buyers compete over a few properties; this is known as a seller's market. As a result, you must understand it's unlikely your first offer will be accepted. You will need to make many offers with few conditions. Offers with fewer conditions are more likely to be accepted by a seller. It's essential to move quickly to close a deal. We have a guide on best practices when making an offer on a home in Canada.
Step Ten: Your Closing Date
Congratulations, moving into a new home is a significant milestone! At this moment, closing costs are due. However, if you followed step five and used our closing cost calculator, there should be no surprises. Additionally, if you couldn't sell your house before buying this property, then you may need bridge financing in between. If you plan to make renovations, you can also finance improvements through home renovation loans.
Additionally, other important tasks to consider include:
- Changing all exterior locks
- General house cleaning
- Potential renovations (such as painting)
- Notify utilities, mail, telecom, etc
- Change driver's license address
- Informing friends and family
The Bottom Line
Although the process may seem time-consuming and anxiety-inducing, having knowledgeable and experienced contacts on hand is critical. Your real estate agent, mortgage broker, and family are all on your side to assist you, so it's essential to have faith in the procedure.
The process will work out in the end, as long as you stick to the steps of saving for a down payment, deciding where you want to buy, obtaining pre-approval, finding an agent, compiling an offer, and closing.