If you are buying your first home, you may find yourself asking questions about your down payment. Is it better to buy now with a smaller down payment or continue to save for a larger down payment? What systems are in place for you to take advantage of? How does your down payment affect your mortgage? In this post, we will answer all these questions and more so you know whether or not you are ready to put a down payment on your new home!
Let’s get the basics out of the way.
What is a mortgage down payment?
A down payment is the amount of money you contribute towards the purchase of a home. Your mortgage is a loan that will cover the rest of the costs. You will pay back this mortgage, with interest, on a monthly basis. This is not new information for you if you are in the market for a new home, but it is always good to think about the basics.
You might think that having a large down payment is the best option. Naturally, the larger the payment, the smaller the mortgage, and if the logic follows, less interest paid. However, interest rates are highly dependent on the mortgage product and your financial situation. In some cases, it may be beneficial to purchase the right property with a smaller down payment. It is important to work with an unbiased mortgage professional to understand your financial goals before making a decision on buying your first home.
Is there a minimum down payment?
The minimum down payment required depends on two things. First, the price of the house you are going to buy, and second, the mortgage amount you will qualify for. The minimum down payment for a home up to $500,000 is five per cent. This increases to 10 per cent for any amount above $500,000 and up to $999,999. You will require a 20 per cent down payment for any amounts over $1 million.
This means that you will have a minimum down payment based on the property purchase price, but you may not qualify for the difference. If you do not qualify for the difference you will have to either increase your down payment or look for a more affordable property. This can get a bit confusing with property values over $500,000 and you should speak to a mortgage broker to understand your options.
In addition, no matter what the price of your new home is, if your down payment is less than 20 per cent you will be required to have mortgage default insurance, which will add to your monthly mortgage payments. It is important to have clear financial goals to understand what down payment is right for you.
Options for first-time buyers
If you are a first-time home buyer you might not be aware of the programs and incentives that you can take advantage of. One program that can aid in getting together a down payment is the RRSP Home Buyers’ Plan (HBP). This will let you withdraw up to $35,000 tax-free from your RRSP to put toward your home. This will take a nice chunk out of your down payment and you have 15 years to repay the HBP. Repayments start the second year after you make your withdrawal. You can find more information about the HBP on the Government of Canada website here.
Another newer incentive available for first time homebuyers is the First-Time Home Buyer Incentive. This provides up to 10 per cent of the purchase cost of a home, through a shared equity program. This program aims to reduce the cost of your mortgage and share the risk of buying a home. This can reduce the amount of your mortgage insurance premium, as well as the amount of interest you need to pay on your mortgage.
It is important to note that you will have to pay back the incentive in the future. You pay back the percentage of shared equity when you sell your home or within 25 years. Additionally, this means the government shares in the risk and reward of purchasing a home. If the house increases in value, the amount you will repay will increase. This also helps to protect the borrower in the event the property decreases in value. If you want more information about the First-Time Home Buyer Incentive, you can read more about it here.
Where can my down payment come from?
Similar to the other mortgage rules and requirements, there are traditional and non-traditional down payment sources you can use for your mortgage. Traditional sources for your down payment can include your savings, TFSAs, RRSP if you are leveraging the Home Buyers Plan, as well as gifted down payments from immediate family members. One example of a non-traditional source is borrowed funds. There are some other non-traditional sources, but the requirements for mortgage insurance are changing and may reduce your ability to leverage these sources for your down payment in the future. As always, a friendly conversation with your mortgage broker can help you navigate these options and determine where to start. A mortgage broker will make sure you’re setting yourself up for a successful financial future.
If you are looking to buy your first home and want to review your options, give me a call at (705) 333-4338 or get in touch with me here!