How to make it as a first-time home buyer in Toronto

With the cost of the average home in Toronto now exceeding $1 million, it can be difficult for first-time buyers to get their foot in the door. That doesn’t mean it’s time to throw in the towel quite yet. Buying your first home in Toronto may still be possible—it’s just going to take a bit of careful planning and creative thinking.

So, what can first-time home buyers do to improve their chances of making their Toronto homeownership goals come true? We break it down below. 

What to expect as a first-time buyer in Toronto

Because succeeding in a competitive market often comes down to setting realistic expectations, it’s important to know what to expect when embarking on your house hunt. 

High property prices, large down payments and twice the amount of land transfer tax as other cities in Ontario—these are just a few of the things that make it tricky to buy your first home in Toronto. (Before even starting your search, check out how much money you need to earn to afford buying in Toronto). 

As in other hot housing markets, buyers in Toronto often face bidding wars, where multiple home buyers try to outbid each other for the same property. They may also be forced to put in unconditional offers, where typical conditions like a home inspection and securing financing are removed to make an offer more appealing. This is on top of the challenges all Canadian first-time home buyers face, including down payment rules, a mortgage stress test, mortgage insurance costs and the possibility that historically low interest rates will soon rise.

Watch: MoneySense – What is the mortgage stress test?

Toronto does have some of the highest property prices in the country, and with the average selling price of home in the city reaching $1,215,700 in December 2021 (up 23% from the year before) buyers are finding themselves needing to shell out larger and larger sums to purchase property. Toronto is not the only high-priced real estate market, of course. Buyers in Vancouver, the country’s most expensive place for buying a home, face many of the same challenges.

The country’s down payment rules is part of what makes buying in expensive markets so difficult for first-time buyers, who don’t have the advantage of having built up equity in an existing property. In Canada, buyers (whether it’s their first property or not) must have a down payment of 5% of the first $500,000 of the purchase price, plus 10% of the portion above $500,000, up to $999,999. When the purchase price crosses $1 million, the minimum jumps to 20%. 

These rules help protect against a downturn in the housing market and help ensure buyers don’t overstretch themselves financially. But they do present a challenge: To put it in real terms, buyers looking at the average Toronto home in December would need more than $243,000 to cover the required 20% down payment. So, what used to buy an entire house less than 10 years ago in other parts of the province now only represents part of the upfront costs of a place in Toronto.

This explains why becoming a first-time home buyer in Toronto requires some creative thinking and a bit of flexibility.

How to get your foot in the door in Toronto

As difficult as it can be to buy your first home in Toronto, there are programs in place to help make things easier. 

One is the municipal land transfer tax rebate program for first-time home buyers. Toronto buyers are subject to both the city’s municipal land transfer tax and the Ontario land transfer tax—meaning they pay up to double the amount as buyers in other parts of the province. 

To help offset those costs, the city offers a land transfer rebate of up to $4,475. It’s a nice benefit, but if you’re buying a home in Toronto, it alone won’t be enough to make a significant dent in your costs. It’s worth noting that the province offers its own rebate of up to $4,000, bringing your total potential rebate up to $8,475. 

Another program is the Home Buyers’ Plan, which allows you to withdraw up to $35,000 from your registered retirement savings plan (RRSP) to help with a first home purchase. A couple, both making close to the maximum withdrawal, will have enough for a minimum down payment on the average $855,000 townhouse in Toronto. So this is a great program to help get your foot in the door.

Remember that your first home doesn’t need to be your forever home. “It’s important to be flexible,” says Kelly Short, real estate agent with Royal Lepage. “First-time home buyers need to get their foot in the door but that can require some compromise.”

The old advice used to be “drive until you qualify,” says Ron Butler, head of Butler Mortgage in Toronto, meaning finding a more affordable home used to be matter of moving further from the city. “But with a bungalow in Paris, Ont. selling for $980,000 that advice is no longer realistic.”

As companies started allowing employees to work from home during the pandemic, many new buyers relocated to smaller towns across Ontario, pushing those property prices upward, too. So, if moving into the Toronto suburbs has become less attractive than staying in the city, one alternative is to think smaller—small homes, small condos, even micro condos starting at 300 square feet.

For many first-time home buyers, aiming for a small home or condo could be the right strategy, especially when the purchase price comes in at under $1 million, making a down payment more accessible. Qualifying for a mortgage that comes with a home of that size is also a lot easier on the average income. Finally, buying a small home allows you to start building up equity, and with future increases in your household income, could make a larger home purchase more feasible down the road.

Is it time to ask for help?

If living small isn’t appealing, then there’s another option: Asking for help.

Not surprisingly, getting help with a home purchase has become quite common in Toronto with nearly one in four first-time home buyers getting help (in the average amount of more than $130,000 during the first three quarters of 2021) from a parent or relative. That’s a substantial increase from the roughly one in eight Toronto parents who did the same back in 2015. “Buying a home in Toronto was always hard,” says Butler. “But now it’s phenomenally difficult without help.”

Although rising home prices have made things difficult for first-time buyers, those already in the market have reaped the benefit of price appreciation, and now more and more parents and relatives seem to be willing to help their children buy their first home. 

Getting help with a down payment is just one part of the home purchase decision, though. First-time home buyers who are fortunate enough to receive a gift must still qualify for a mortgage. A gift may help with the down payment, but you’ll still require a substantial household income to qualify for a mortgage. It’s important to understand how that mortgage fits into the overall budget to avoid feeling stretched after purchasing a home.

For those who don’t have access to family money, it may be possible to borrow a portion of your down payment, for example through a line of credit or personal loan, as long as you’re using some of your own savings, too. To do so, you will likely need a solid credit score and above-average income. And the funds will have to come from a different financial institution than the one you’re obtaining a mortgage from. This strategy also comes with the risk of borrowing more money than you can realistically pay back and should therefore not be pursued without careful consideration.

Is it time to consider alternatives?

If these options are unavailable or simply unappealing to you, then it may be time to look at alternatives. Compromising on the location and size of your future home is just one of the options. Besides, finding an affordable home outside the city isn’t as easy as it used to be and buyers are needing to look further than in the past.

Continuing to rent is another important option to consider. A home purchase becomes easier with higher income and more savings. Renting can help a first-time home buyer focus on increasing their income and savings, two important criteria when purchasing a home.

Rather than stretching financially, making the pragmatic choice about a home purchase, such as continuing to rent and save for a down payment, could ultimately be the better decision for you. Either way, when the time comes, you’ll likely need to be flexible, creative and ready to take advantage of home buying programs to make Toronto homeownership a reality.

MORE ON REAL ESTATE:

• How to benefit from being a first-time home buyer in B.C.

• What it’s like to be a first-time home buyer in Ontario—for real

• Read this before applying for the First-Time Home Buyer Incentive

• 7 smart strategies for first-time home buyers