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It is great that you wish to buy a new home. If you can pay the whole amount in cash, you are one of the privileged few. The reality is that many people don’t have enough money to be able to make such a purchase. Most people take out a loan from banks or other financial institutions.
Before you can take out a loan, however, you must first come up with a mortgage down payment. In Canada, you must pay for it yourself; you can’t borrow money for that if you are paying less than 20% of the home purchase price for the down payment.
What is Mortgage Down Payment
Mortgage down payment refers to how much money you will need to pay immediately out of your pocket when you buy a house. In most cases, a percentage is used to indicate the amount of the down payment you should pay.
This percentage is derived by calculating the amount of the down payment divided by the cost of the house.
Mortgage Down Payment in Canada
If you plan on buying a home in Canada, you should know that the minimum amount for a down payment required is directly linked to the cost of the house that you are planning to buy. Therefore, if the cost of the home is under $500,000, the minimum down payment is set at 5%.
If the house you’re planning to buy ranges from $500,000 to $999,999, the minimum down payment required is 5% of the first $500,000 and then 10% for the balance. If the house costs $1 million or more, you have to pay a minimum of 20%.
Using Mortgage Default Insurance
A mortgage default insurance protects the lending institution where you have taken out a loan for the purchase of your new home. This type of insurance is frequently called CMHC insurance. If the home buyer (you) defaults on your mortgage payments, the lender will be covered.
This insurance is mandatory for all loans of mortgages where the buyer has paid a mortgage down payment of less than 20% of the property’s purchase cost. The mortgages requiring the provision of mortgage default insurance are referred to as mortgages with high ratios.
A traditional mortgage comprises down payments of 20% and above of the home’s purchase cost. Many home buyers in Canada do try to provide a down payment of a minimum of 20% to avoid having to get mortgage default insurance. Indeed, when you pay a down payment of 20% or more, you won’t need to get the insurance (and save money on the premiums).
Your Mortgage Down Payment
There are several things that are impacted by the amount of the mortgage down payment that you have to put down on a new home.
It has an impact on how much money you can borrow for the mortgage. It also impacts the amount that you have to pay every month to pay back the loan. The cost of the mortgage default insurance is also impacted by the amount of your down payment.
In Canada, it is mandated that a mortgage down payment should be set at a minimum of 5% of the home’s purchase cost. This serves as a benchmark to determine the maximum amount of mortgage you can afford when buying a house.
Home buyers can decide on what kind of home they can afford by looking at their actual income and any outstanding debts. As the amount of the down payment, is set on a sliding scale, the calculation is dependent on whether your down payment is above $25,000 or less.
If the amount of the mortgage down payment is $25,000 or below, it means that your down payment is 5% of the cost of your home. That is, when you can provide a down payment of $25,000, the most affordable home for you should cost $500,000. This is because $25,000 dollars is 5% of $500,000.
Based on the reality that what you can afford to buy depends on your debts and your income, it is prudent for you to use a calculator specifically designed to determine the affordability of your mortgage. Such a calculator will be able to generate an analysis that will greatly help you in deciding which home to buy.
Remember, the amount of money that you have for your mortgage down payment directly impacts the amount of money that you will need to borrow for the loan of the mortgage. Thus, when you have a large down payment, your capital (and the interest incurred) will be lower. This means that you will pay a little less each month.
However, when you have a smaller down payment, you will need to take out a bigger loan for your mortgage. This increases your monthly payments as well.
Calculating the Cost of the Mortgage Default Insurance
The premium that you pay for your mortgage default insurance is calculated as a portion of the amount of the loan of mortgage. Thus, the premium is decreased when you pay a bigger down payment.
If your mortgage down payment is within 5% to 9%, the amount of your mortgage default insurance will equate to 4% of the amount of the loan. If you can pay a down payment equivalent to 10% to 14% of your new home’s purchase cost, you can expect the premium for your mortgage default insurance to be just a bit above 3%.
If you provide a down payment of 15% to 19%, your premium will go down to under 3%. However, if you can pay 20% or more as a down payment, then you won’t need to have mortgage default insurance at all and you won’t need to pay the premiums.
Author Bio
Mohamed Konate is a personal finance expert, blogger, and marketing consultant based out of Toronto. He is a former financial services professional who worked for many years at major Canadian financial institutions where he managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor in Business Administration from the University of Quebec (Montreal) and a Master in International Business from the University of Sherbrooke (Quebec).He is also the author of the Canadian Credit Card Guidebook.
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