Understanding your down payment and how it can affect your mortgage.
In Canada, home buyers are required to have a minimum down payment before they can purchase a home. Here is a brief overview of how they are calculated, where the funds can come from, and how the amount of down payment you have can affect your mortgage.
How much do you have to save for a down payment?
Down payments are calculated as such:
· A minimum of 5% is required for homes with a purchase price of $500,000 or less.
· A minimum of 5% is required for the first $500,000, and 10% is required for the remaining amount for homes with a purchase price of $999,999 or less.
· A minimum of 20% is required for homes with a purchase price of $1,000,000 or more.
Here are some examples for you.
1. For a home with a purchase price of $450,000, you are required to have a down payment of $22,500 (450,000 x 0.05 = 22,500).
2. For a home with a purchase price of $850,000, you are required to have a down payment of $60,000 (500,000 x 0.05 = 25,000. 350,000 x 0.10 = 35,000. 25,000 + 35,000 = 60,000).
3. For a home with a purchase price of $1,250,000, you are required to have a down payment of $250,000 (1,250,000 x 0.20 = 250,000).
Where your down payment funds can come from
Your down payment can come from your savings, your Registered Retirement Savings Plan (RRSP) through the Home Buyers’ Plan (HBP), the First-Time Home Buyer Incentive (FTHBI), or gifted from an immediate family member (parents, grandparents, and siblings). If your down payment is gifted money, the lender will require a signed gift letter to confirm that the funds are a gift and not a loan, and you will need to provide proof that the gifted funds have been deposited into your bank account.
How the amount of your down payment affects your mortgage
The amount of down payment you have for your home will determine the type of mortgage you obtain. If your down payment equals less than 20% of the purchase price of your home, you will have a high-ratio mortgage. If your down payment equals 20% or more of the purchase price of your home, you will have a conventional mortgage. If you obtain a high-ratio mortgage, you are required to have mortgage default insurance.
There are three mortgage insurers in Canada, Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guarantee. Mortgage default insurance premiums typically range between 0.6% and 4.5% of your loan, depending on the amount of your down payment, and can be paid as a lump sum at the time of your purchase, or the insurance can be added to your mortgage payments. If you add the premium to your mortgage payments, you will be required to pay interest on the premium. The interest you’ll pay on the premium will be set at the same rate you’re paying for on your mortgage.
For more information, feel free to reach out.
Nadia
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