How Much Down Payment Do I Need?
How much down payment is required to purchase a home? Of course, the answer for this question will differ from person to person. But the rules and conditions surrounding down payments are the same for everyone.
When purchasing a home your down payment is typically the first step. It is very unlikely for an individual to enter the market if they do not have a down payment saved. It is also not easy saving and obtaining enough down payment in todays market.
Here I will explain what you need to know about down payments and the different ways you can source your down payment.
How Much Down Payment is Required?
The rules in Canada, require a minimum of 5% down payment for homes less than $500,000. For homes with a purchase price that exceeds $500,000, a 10% down payment is required for the amount that is between $500,000 and $1 million. Lastly for houses over $1 million, the required down payment will always be at least 20%. For example:
|Purchase Price||Down Payment Requirement|
|Less than $500,000||%5 down payment required|
|In Between $500,000 – $1,000,000||5% of the first $500,000 of the purchase price 10% for the portion of the purchase price above $500,000|
|$1,000,000 or more||20% down payment required|
How to calculate your minimum down payment?
Now we understand that the calculation of the down payment required, depends mostly on the purchase price of the home.
What If the purchase price of your home is less than $500,000?
If the home has a purchase price of $375,000. The buyer will be required to have a minimum down payment of 5% of the purchase price. The calculations are simple in scenarios with a purchase price $500,000 or less. The purchase price multiplied by 5% is equal to $18,750. The buyer will be responsible to have $18,750 saved not including your closing cost.
What If the purchase price of your home is more than $500,000 but less than $1 million?
If the home has a purchase price $800,000. This is where some may run into confusion. In this scenario you can calculate your required down payment by adding 2 amounts. The first amount is 5% of the first $500,000, which is equal to $25,000. The second amount is 10% of the remaining balance of $300,000, which is equal to $30,000. The sum of which gives you a total of $55,000.
Any home with a purchase price $1 million or more, will be required to have 20% down payment.
Buyers who may be self-employed or in some cases have a poor credit history, your lender may require you to have a larger down payment saved. Speak with your mortgage broker to find out how much you down payment you may need.
In most cases the minimum down payment must come from your own sources. It is always best to plan and save for your down payment, however every situation is different. There are few different ways a buyer may source there down payment. For example:
- Personal savings
- RRSP’s loans
- Gifts from family member
- Refinanced assets
If you are a First Time Home Buyer there are government programs and benefits put in place to help you with your down payment and various costs associated with purchasing a home. These benefits and programs include:
- RRSP’s Home Buyers plan
- Land Transfer Tax Rebate
- First Time Home Buyers Tax Credit
- First Time Home Buyers Incentive
What is mortgage default insurance?
If your purchasing a home with less than 20% down payment, you will be required to apply for mortgage default insurance. Just to clarify mortgage default insurance is not for the borrower. In fact, its there to protect the lender just in case the borrower begins to struggle repaying their mortgage. Its purpose is to encourage lenders to lend their funds to borrowers who have minimal down payment to purchase a home. The three providers of mortgage default insurance in Canada are:
- Genworth Financial
- Canada Guaranty
Without the mortgage insurers in place mortgage rates would be much higher for those with down payments of less than 20%, because they would be viewed as high risk. The risk of default now falls on the lap of the mortgage insurers. But because mortgages are protected, lenders feel comfortable offering lower rates.
However, something to keep in mid. The Canadian mortgage insurers also have there own, set of criteria at which you need to qualify. For down payments, the insurers may require down payments to be non borrowed, saved for a minimum of 3 months and they must have the bank statements to prove it. These rules may sometimes vary, speak with your WISE mortgage agent, and find out what is required of you.
Mortgages can be tricky, especially as a first-time home buyer. Understanding what is required by yourself is no easy task. Utilize your professionals ask questions and get the right answers. Knowing what you need for a down payment and how to go about saving for it, will make you one step closer to buying your new home.
Are you a first-time home buyer? Talk to your Wise mortgage agent today. Download and Enjoy our Free E-BOOK for first time home buyers. Gain some insight and prepare yourself before taking the leap in home ownership.
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