Not many of us hopefully home buyers (first-time buyers and others) have significant savings to buy a home outright without a mortgage. Most of us, rely on our banking institutions for assistance with financial loans.
The down payment is the portion of the purchase price you provide
yourself – could be from various sources, please see below. The remaining balance is comes from a financial institution in the form of a mortgage loan.
When purchasing your first home, one of the most important decisions you will make is the size of your down payment. The amount of the down payment (which represents your financial stake or the equity in your new home) should be determined before you start shopping for your new home.
Most commonly, people put down 10-25% of the purchase price of the property as a down payment. Note that there is no limit to the size of the down payment that you can make.
An important thing to note is that the larger the down payment is, the less your home will cost in the long run. This is because with a smaller mortgage, interest costs will be lower, and over time this will add up to significant savings.
The minimum downpayment on any owner occupied home in Canada is 5% for a purchase price less than or equal to $500,000. For homes for a purchase price greater than $500,000 (and less than $1 million), the minimum downpayment is 5% of the first $500,000, plus 10% of the remaining balance. This type of mortgage is commonly referred to as an insured or high ratio mortgage.
To see how this works, consider a property with a $600,000 selling price. The minimum down payment in this case is $35,000, which is determined as follows:
5% of $500,000 = $25,000
10% of ($600,000 – $500,000) = $10,000
Total required down payment = $35,000
In Canada, if you’re putting anything less than 20% down payment to purchase a home, mortgage default insurance is mandatory. This insurance protects lenders, in the event a borrower ever stopped making payments and defaulted on their mortgage loan.
The mortgage default insurance premium is paid by the borrower(s) to the lender and it is calculated as a percentage of your mortgage amount. This percentage varies depending on your down payment percentage. The cost of the insurance premium is added to the total mortgage amount which is repaid over your amortization period and is incorporated into your mortgage payments.
With a down payment of 5% – 9.99% your premium is 4.00% of your mortgage amount
With a down payment of 10% – 14.99% – your premium is 3.10% of your mortgage amount
With a down payment of 15% – 19.99% – your premium is 2.80% of your mortgage amount
For example, if you are purchasing a home with only 5% down payment, you mortgage default insurance premium will be calculated your mortgage amount as follows:
Total Purchase Price = $500,000
5% down payment of Purchase Price = $25,000
Mortgage Amount = $475,000
+ Mortgage Default Insurance Premium (4.00% of Mortgage Amount) = $19,000
Total Mortgage Amount = $494,000
Ontario, Manitoba and Quebec apply provincial sales tax to mortgage loan insurance premiums. Provincial taxes on premiums can’t be added to your mortgage loan. You must pay these taxes when your lender funds your mortgage.
In Canada, there are three major insurers. The Canada Mortgage and Housing Corporation (CMHC) is a crown corporation and the largest provider of mortgage default insurance in Canada. Genworth Financial and Canada Guaranty also provide mortgage default insurance to lenders.
The minimum down payment requirement is subject to maximum price restrictions, which means that the purchase price cannot exceed $999,999. Anything over this purchase price, requires a minimum down payment of 20% and is commonly referred to as a conventional or an uninsured mortgage.
Also, the maximum amortization for an insured mortgage is 25 years.
Although the amount can be paid in a lump sum, the premiums are often added to your total loan amount which is repaid over your amortization period and is incorporated into your mortgage payments.
Although mortgage default insurance costs homebuyers 2.80% – 4.00% of their mortgage amount, it does allow Canadians, who might not otherwise be able to purchase homes and have access to the Canadian real estate market.
Lenders are also able to offer lower and competitive mortgage rates when mortgages are protected by mortgage default insurance, because the risk of default is passed along to the mortgage insurer.
There are several options to secure down payment. Some common sources of down payment include:
Personal Savings – this includes Tax Free Savings Accounts (TFSAs), GICs, stocks or other types of investments.
RRSPs – as a first time home buyer you can withdraw up to $35,000 ($70,000 for a couple) under the Home Buyers’ Plan (HBP) from your RRSPs without having to pay tax on it as long as it is repaid within 15 years. To qualify, the RRSP funds you plan to use must have been in your RRSP account for at least 90 days.
Gifted Down Payment – to gather the funds you need for a down payment, you can also benefit from a family gift. For this option to work, it must be a real gift and not a loan.
To help you come up with a down payment, you may be eligible for the Home Buyers’ Plan (HBP). The Home Buyers’ Plan allows you to withdraw up to $35,000, tax-free, from your Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home. You have up to 15 years to repay the amounts you withdrew.
Before you sign up for the Home Buyers’ Plan, consider:
– if you’ll be able to make the repayments
– will withdrawing funds impact your retirement savings
Keep in mind:
– Not making the repayments could end up costing you a lot of money in income tax
– Even though you’ll eventually repay the funds, you may still lose out on any growth while the funds are withdrawn
If you’re buying your first home, you may be eligible for a shared equity mortgage with the Government of Canada. A shared equity mortgage is one where the government offers you financing without interest to help reduce your monthly mortgage payment without increasing your down payment.
Through the First-Time Home Buyer Incentive, the Government of Canada offers to a first-time home buyer:
– 5% of the purchase price of an existing home
– 5% or 10% of the purchase price of a newly constructed home
You need to repay the incentive after 25 years, or when you sell the property. You can also repay it at any time without a pre-payment penalty.
The repayment is based on the property’s fair market value at the time of repayment.
Find out if you are eligible for the First-Time Home Buyer Incentive
Before you start hunting for a home, the best place to start is by connecting with a Mortgage Broker. You need to know what you can afford.
Read here for 5 reasons for working with a Mortgage Broker.
Ideally you will want a mortgage pre-approval, which is an in-depth process done by the lender to determine your mortgage affordability. The size of the mortgage you can get approved for is based on a variety of factors.
The most vital ones include the size of your down payment, credit worthiness, your current liabilities and your income.
– It will let you know the maximum you are qualified for
– Lets you lock-in interest rate for 120 days
– A mortgage pre-approval can also help your negotiating power. Buyers who are not pre-approved might be perceived as an unprepared buyer for a potential seller.
Save as much as you can for your down payment. The bigger the down payment, the smaller the mortgage, which can save you thousands of dollars in interest charges.
This blog post is written by guest blogger Reena Visani, a licensed Mortgage Agent with Affinity Mortgage Solutions, Canada’s top 2% of Dominion Lending Centres Brokerages and Madiha Khan, founder of Toronto Condo Investments and a realtor with Century 21 Atria Realty Inc.
Reena can be reached at 416.561.2454, visanireena@gmail.com, reenavisani.ca
Madiha can be reached at 647.262.2300, info@torontocondoinvestments.ca
