How to transition from renting to owning a home in Canada

In his column for CTVNews.ca, personal finance contributor Christopher Liew offers a step-by-step guide on how to make the shift from renting to becoming a homeowner (Getty Images / FG Trade)

Are you tired of renting where you live?

If you’re ready to make the transition from renter to homeowner, you’ll need to make sure you have your credit, finances, and savings in order. Unlike finding a new rental unit, which is relatively quick and easy, buying a house can be a lengthy process that involves a lot of paperwork.

The better you can prepare ahead of time, the easier the process will be. Below, I’ll give you a step-by-step guide on how to make the shift to becoming a homeowner, and show you what you can start doing today to help the process go smoother.

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When is it the right time to buy?

A potential good time to buy is when interest rates are low. When you’re talking about purchasing a home that can cost hundreds of thousands of dollars or more, something as small as a two- or three-per-cent interest rate change could cost you tens of thousands of dollars.

Following the pandemic, the central bank’s overnight interest rate peaked at 5 per cent in July 2023 and remained high until June 2024, when it dropped to 4.75 per cent, and again to 4.5 per cent in August.

According to Statistics Canada, the annual inflation rate dropped below the central bank’s target, which means that we could see more rate cuts in the near future.

If interest rates continue to fall, the coming years could be a great time to buy if you want to avoid the exorbitant interest rates that we’ve seen in the past couple of years.

Steps to transition from renting to owning

Here are the steps you can start taking today to get ready to become a homeowner.

1. Figure out how much house you can afford

First things first, you need to figure out how much home you can afford. In place of a monthly rent payment, you’re going to have a mortgage payment. Similar to a car payment, your mortgage payment will include both principal and interest toward the purchase of your home. Typically, your home insurance and/or mortgage insurance may also be added onto this payment.

Your mortgage payment will depend on a few different factors, including:

• The cost of the home you’re buying
• How much of a down payment you’re making
• Your mortgage interest rate
• The length of your mortgage term

A real estate agent or mortgage broker can help you look over your finances to help you figure out exactly what your budget is.

2. Save up for your first home down payment

For first-time home buyers in Canada, maximizing savings for a down payment is key. Two powerful tools to achieve this are the First Home Savings Account (FHSA) and the Home Buyers' Plan (HBP).

The FHSA allows first-time buyers to save up to $40,000 tax-free, with an annual contribution limit of $8,000. Contributions are tax-deductible, like an RRSP, and withdrawals used for a home purchase are tax-free, similar to a TFSA.

The HBP lets individuals withdraw funds from their RRSPs for a home purchase, with a new increased limit of $60,000 per person. Withdrawals are tax-free if repaid to the RRSP over 15 years.

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By using both the FHSA and HBP, you can access up to $100,000 for your down payment, which can be a huge boost towards your first home.

3. Start repairing and optimizing your credit

As far as banks are concerned, applying for a home loan is a big deal and requires a lot of trust. The lending bank is going to take a close look at your credit profile and history. To approve you in the first place, they’re going to want to see a decent credit score.

They’re also going to want to see good credit history, which means:

• A history of making timely car and other bill payments
• The ability to manage a credit card and make minimum payments
• Lines of credit in your name

If your credit score is less than ideal or you have some negative items (such as missed payments), it may be a good idea to use a credit repair service to help you improve your score and get negative items removed.

4. Income and job stability

To get a mortgage in Canada, your income and job stability are super important. Lenders want to know that you’ll be able to make your monthly payments without any issues. If you have a full-time, permanent job, that’s a huge plus as it shows that your income is steady. If you’re self-employed, no worries, but you’ll need to provide more paperwork, like your last two years of tax returns, to show that your income is reliable.

Lenders also look at how much of your income goes to housing and debt through what’s called debt service ratios. Basically, they want to see that your monthly mortgage payment won’t stretch your budget too thin. Keeping those ratios low helps a lot.

5. Start looking for homes online

As you get your finances in order, it’s time for the fun part -- shopping online.

During this process, you’ll want to start looking at homes and figuring out homes in your budget that fit your needs and wants. Many websites and real estate companies offer virtual 360-degree tours of homes, so you can evaluate them inside and out without having to drive out to the actual property.

Final thoughts

While becoming a homeowner certainly comes with its fair share of responsibilities, the feeling of owning the roof over your head and being able to do whatever you want in your home without having to ask your landlord can be a truly freeing feeling.

If you’re thinking about making the switch, keep in mind the tips I mentioned above and do what you can now to improve your credit, solidify your income history, and start setting money aside for your down payment.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial