A down payment is the amount you put towards the purchase of a home. Then your lender deducts the down payment from the purchase price of your home. Your mortgage then covers the rest of the price of the home. The minimum down payment you need depends on the purchase price of the home. If your down payment is less than 20% of the price of your home, you must purchase mortgage loan insurance.
What Is Mortgage Loan Insurance?
Getting mortgage loan insurance doesn’t protect you, it protects the mortgage lender, in case you can’t make your mortgage payments. Mortgage loan insurance in some cases, is also called mortgage default insurance.
Your lender may encourage you to get mortgage loan insurance, even if you have a 20% down payment. This is usually the case if you’re self-employed or have a poor credit history. Mortgage loan insurance isn’t available if:
- the purchase price of the home is $1 million or more
- the loan doesn’t meet the mortgage insurance company’s standards
- Your lender coordinates getting mortgage loan insurance on your behalf if you need it.
The fee that you’ll pay for mortgage loan insurance is called a premium. Mortgage loan insurance premium ranges from 0.6% to 4.50% of the amount of your mortgage. Your premium depends on the amount of your down payment. The bigger your down payment, the less you pay in mortgage loan insurance premiums. Find premiums based on the amount of your mortgage:
- Canada Mortgage and Housing Corporation (CMHC)
- Canada Guaranty Mortgage Insurance Company
Basic Down Payment Requirements
With all Mortgages you’ll need to know the right requirements needed for when it comes to your down payment. It’s important to understand and note the following requirements:
- 5% on the first $500K
- 10% on the remainder (up to a million)
- One million and higher requires 20%.
First Time Home Buyer’s Incentive
First-time home buyers may be eligible for a shared equity mortgage with the Government of Canada. With a shared equity mortgage, the government offers financing to assist with your down payment, without any interest. This will help reduce your monthly mortgage 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 prepayment penalty. The property’s fair market value at the time of repayment will determine the repayment amount.
How Down Payment Affects Total Cost of Your Mortgage
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.
Example: How the size of a down payment affects the cost of a mortgage
- Suppose you buy a home that costs $400,000.
- Assume the following:
- interest rate is 4%
- amortization period is 25 years
- payment frequency is monthly
- mortgage loan insurance premiums are added to the mortgage
With investment properties, you’ll need to put 5% down payment down regardless if this is your first time buying a home or your 20th. The following investment properties are properties which you can put a minimum of 5% down:
- Vacation Homes
- Secondary Homes
In other cases, if you’re looking to purchase a property and use this property as a rental, then you’ll have to put down 20% down payment regardless if you’re a first time home buyer or not.
Benefits of a 20% Down Payment
A few benefits for if you can get to 20% down payment, you’re then better off with getting a slightly higher rate, than a paying a 3% – 4% CMHC premium. The savings, in most cases, are easily in the thousands of dollars, with a 20% down payment Vs. a lower rate CMHC insured mortgage.
Even though your rate would be higher at 20% down, your cost of borrowing would be lower. But for most people, if you have the 20% down then you are better off with the higher down payment.
Also, at 20% down payment, the 30-year amortization becomes available. With less than 20% down payment, a 30-year amortization is not available. A 30-year amortization in and of itself can have the benefit of increasing your purchase price if this is something you are looking for.
It is VERY important to have a clear understanding of the implications that may happen when it comes to down payment, and how it can affect you. It makes all the difference in future planning and can impact you in very significant ways.
At GLM Mortgage Group, we know what questions to ask. We have relationships with the lenders that you know about and the lenders you don’t. We would be pleased to educate you on the financial options available to you. We want you to make the best decision possible on the mortgage that you are committing to. Call us anytime for a FREE consultation on the mortgage products available to you.