What is a down payment?
When you buy a property, there is an upfront payment that is called a down payment that helps initiate the mortgage monthly payments and is one of the largest primary investments when getting a mortgage. In Canada, the minimum required down payment is 5% of the purchase price. A down payment can be paid by you, or it can be gifted by an immediate family member. In some cases, the down payment can be borrowed from an existing credit facility such as a line of credit. The down payment is one of the primary factors that many homeowners consider before buying a home.
Down Payments vs. Deposits for a Home
We don’t want you to get confused between the difference of a down payment and a deposit on a home. They mean two different things. When it comes to a down payment, the down payment is paid when you close the property sale.. You will bring the necessary down payment funds to your lawyer’s office, generally by way of a bank draft or certified cheque.
A deposit on a home is the money you provide to the Real Estate company as an assurance that you’re serious about buying the home. This deposit is typically put in a trust until the home closes and is subtracted from the overall down payment required at the time of closing.
Things to Consider About Down Payments
Mortgage default insurance is a fee that protects lenders from homeowners potentially defaulting on their mortgage payments. Any home purchase with less than a 20% down payment must include mortgage default insurance. How much you pay as your down payment will determine how much you pay in the default mortgage insurance premium. The premium will be added to your mortgage, you do not need to pay it upfront. The ranges of fees are below:
If you pay 5-9.99% down on your mortgage, you’ll be charged 4%.
If you pay 10-14.99% down on your mortgage, you’ll be charged 3.1%
If you pay 15-19.99% down on your mortgage, you’ll be charged 2.8%
If you pay 20% (or more) down, you avoid Mortgage Default Insurance premiums.
How Do I Know How Much to Pay for my Down Payment?
The best way to determine how much you’ll be required to pay as a down payment is to speak to a mortgage broker. A mortgage broker can help you assess how much you can afford when looking for a home. Knowing how much you can afford to pay will also be a huge factor in determining the down payment. There are some general requirements as well, they are below:
- If your home value is less than $500K, 5% of the purchase price is required.
- If the home value is more than $500K but less than $999,999, then 5% of the purchase price up to $500K plus 10% on the remaining amount is required.
- If the property is valued at more than $1 Million, a minimum of 20% down payment will be required.
Are there any programs available to assist with a down payment?
The Government of Canada has two programs that could help you acquire the necessary funds for your down payment.
The Home Buyer’s Plan: This plan allows you to withdraw up to $35,000 from your RRSPs without any taxation. However, if you don’t repay this within 15 years, the taxation is factored in. This is a great way to utilize some of your savings for a home! Be careful when using your RRSPs, as growth could be lost through this withdrawal.
Government of Canada’s First-Time Homebuyer Incentive: Provided you have the minimum 5% down payment from your own resources, this “incentive” can add an additional 5% of an existing home’s value or up to 10% for newly built homes. This incentive must be repaid after 25 years or at the time the property is sold. You can safely repay this before the deadline without any penalty.
Do you have questions? Ask a mortgage broker!
If you have any questions about the mortgage process, mortgage pre-approvals, or down payments, reach out to one of our expert mortgage brokers today. We can help you with your home-buying journey! Get started by clicking Contact Us.
