Mortgage Down Payments: What You Need to Know

Posted by Justin Havre on Tuesday, August 15th, 2017 at 10:11am.

What to Know About Down PaymentsOne of the larger expenses you must pay when you buy a home is the down payment. You might think you have to pay at least 20 percent, but there are options to pay less. With this information, you can determine what you will be required to pay, and how to decide whether to pay the minimum or more.

Paying a Standard Down Payment

For decades, lenders have held a standard down payment to be 20 percent or more. Lenders believe that if you share a significant stake in the ownership of the home, you will be more committed to paying the mortgage. If you apply for a mortgage with this kind of down payment, you will pay one-fifth of the home's sale price. As a result, you will hold that much equity in the home. A standard down payment is ideal for most home purchases because it helps prove to the lender that you are an excellent borrower. The larger the down payment you make, the less you will pay in interest over the life of the loan.

Minimum Down Payments

Estimating a minimum down payment for a mortgage loan depends on the size of the loan itself, as well as your personal eligibility. People who are self-employed or who have a spotty credit history may be expected to pay a higher down payment to negate the risk they present to a lender. As a general rule, you must pay at least 5 percent down on any mortgage, for homes priced up to $500,000. If you buy a home that costs more than that, your lender will require an additional down payment of 10 percent of the difference between the home's sale price and $500,000. For homes priced over $1 million, the minimum down payment is 20 percent across the board.

Obtaining Funds for a Down Payment

Getting the money for a down payment may be exceptionally difficult, especially if you do not already own a home that increases in value. Typically, lenders expect you to save up the money for the down payment from your own funds, since obtaining a loan for the money puts you further into debt. If you are a first-time home buyer, you may be eligible to participate in the Home Buyers' Plan (HBP). With the HBP, you can withdraw up to $25,000 from a registered retirement savings plan (RRSP) to cover some of your down payment. However, you must be able to prove that either you, your spouse or common-law partner is a first-time home buyer. In order to withdraw from an RRSP, it must be in your name, with funds in place for at least 90 days. You should also plan to purchase the home by Oct. 1 of the following year after you make the withdrawal.

Paying Mortgage Insurance

If you are wondering why someone who could make a bigger down payment would not choose to pay the least amount they can, you should know about mortgage insurance. Mortgage insurance is a payment you make that protects the lender in case you default on the loan. Since borrowers who make the smallest down payments represent the biggest risk, they tend to pay a higher percentage of the home's value in mortgage insurance. Some provinces add sales tax to this fee. If you tack on the mortgage insurance to your mortgage, you will pay interest on it, as well. The good news is that if you have accrued 20 percent equity in the home by the time you need to renegotiate the loan, you may be able to avoid paying mortgage insurance in the next term.

Future Factors to Consider

The biggest decision to make is whether it makes more sense to save up more money now, or to buy a home now with a lower down payment. In some hotter real estate markets, such as Toronto or Vancouver, there may be a true cost to waiting to buy as prices continue to rise. Before you buy a property, you should confirm that you are prepared to shoulder all the costs associated with the mortgage and the upkeep of the home. Even if you can qualify for a lower down payment, you must still pay to insure the home, fees for utilities and services, as well as any home improvements you make while you own it.

Buying a home is expensive, especially the down payment. With these tips, you will be better informed about the benefits of a standard or minimum down payment, and which one may best suit your circumstances – even if you're purchasing a luxurious home in Glenmore.

Justin Havre

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