How Much of a Down Payment Do I Need To Buy a Home, and Where Can I Get it From?
How much of a down payment do I need to buy a home, and where can I get it from?
I come across all sorts of misconceptions regarding how much of a down payment is required in order to purchase a home; be it absolutely having to have 20% of the purchase price, to not having to have any down payment at all if you’re a first time home buyer. While the days of 0% financing are long gone in Canada, there are ways to get your foot in the door of the housing market without having to get all the money together completely by yourself.
You can buy a home with as little of a down payment as 5% of the purchase price. Now that’s 5% on the first $500,000 of the purchase price, and then 10% is required on any portion exceeding $500,000 up to $1 million:
If you were buying a house for $700,000, you’d need 5% of $500,000 = $25,000 and 10% of $200,000 = $20,000 for a minimum total down payment of $45,000 or 6.43% of the purchase price.
A 20% down payment is required on properties valued over $1 million.
If you have a down payment of less than 20% you have to pay mortgage default insurance on the loan amount. This premium typically gets rolled into your mortgage and amortized over the lifetime of the loan. You can pay this premium up front, but it’s likely you won’t have the money to do so, otherwise you’d be using it towards the down payment.
People get put off by the idea of mortgage default insurance as it is mainly for the benefit or the mortgage lender. However the fact that the mortgage is insured means the lender will typically offer you a more favourable interest rate as their risk is negated. The insurance premium is calculated on a sliding scale: The closer you are to 20% down payment, the lower the percentage you pay.
Ideally it’s best to have a 20% down payment if you’re buying a home to avoid paying mortgage default insurance, but housing prices have risen so rapidly in Canada in the past few years, that saving this amount could take years for a first time buyer. If you wait longer to save to get to that 20% down payment, housing prices are still increasing, and therefore so does the required amount for the down payment. By putting as little as 5% down, your house is building equity and all the while you’re paying down the principal on your mortgage.
The down payment for your house can come from various resources:
Personal Savings: All that money you’ve been putting aside during your working life can go towards the down payment on your home. It may take you a while to get there, but with a proper plan and some discipline, it can be done. Saving the money yourself shows good commitment from you to the lender that homeownership is a goal of yours.
Gift: An immediate family member (typically parents) are able to gift you some or all of the down payment. This will have to be accompanied by a gift letter stating the loan does not have to be repaid; expect the lender to check this. Keep in mind with a gifted down payment, the mortgage lender will want to see you are stronger in other areas of your application, eg. good credit, solid employment history, have saved the closing costs for the property yourself.
Ideally some of the down payment would be from your own resources to show your commitment to purchasing a home, but a full gift is acceptable.
Down Payment Assistance Grants: These are forgivable loans given by your local county for the down payment on a home. The loan is typically 5-10% of the purchase price and does not have to be repaid if you live in the home for 20 years. There are eligibility criteria including; having to be currently renting, maximum purchase price, maximum household income cap and maximum amount of personal assets – the criteria varies from county to county.
Home Buyers’ Plan: You can withdraw up to $25,000 ($50,000 for a couple) from your RRSP to help finance the down payment on your home. The withdrawal isn’t taxable as long as you repay it within 15 years, and you have to pay back at least 1/15 of the total amount per year. This is particularly useful for people who already have a sizeable down payment and want to get to the 20% threshold to avoid paying the mortgage default insurance premium.
Borrowed Down Payment Program: Buyers with a strong credit profile are able to borrow 5% – 9.99% of their down payment from sources at an arms length from the purchase transaction. This includes personal loans, lines of credit, credit cards and non-immediate family members. Good credit history is key to taking advantage of this program, and the borrowed down payment has to be factored into the mortgage lending calculation.
Existing Equity: If you already own a home, chances are in the past few years the value of your home has risen dramatically. This gain in equity can be used to increase the down payment on your next home, and therefore increase your maximum purchase price.
If you already live in your forever home, or are looking for money for other projects in your life, recent large gains in property prices give you access to the possibility of refinancing to take out some of that equity, or running a Home Equity Line of Credit (HELOC).
If you’re looking at purchasing an income property, leveraging the down payment from equity in your primary residence through a HELOC has tax benefits associated with it.
Please reach out to me if you want to discuss any of the down payment options mentioned above in more detail.
Tim Ward – Mortgage Agent
Tim Ward is a Mortgage Agent with The Mortgage Centre. If you or anyone you know requires free independent advice pertaining to mortgages or managing your credit, please feel free to contact me via the below methods.
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