For first-time home buyers and property investors, the amount of money you'll need to have available for your downpayment can be cause for concern. With housing prices continuing to rise, downpayments are also increasing. For first-timers or individuals, it can seem like an insurmountable amount to save. The percentage of your downpayment also has implications for whether your mortgage needs to be insured, which can add to your costs. What is the minimum amount you can put down? How much should you put down, and how do you get that money? We offer a little bit of advice here.
Minimum Downpayments Allowed in Canada
The amount of your downpayment you need to put down depends on the sale price of the home. For homes priced at up to $500,000, you must put a minimum downpayment of 5%, or $25,000. The minimum for a house priced at $500,000 to $1 million is 10%, and over 1 million, the minimum downpayment allowed is 20% or $200,000. With the average housing price in Niagara Falls coming in at just under $700,000, you'll be looking at a minimum of about $70,000 to purchase a home. So should you aim for just the minimum, or is it better to put down more?
High-Ratio versus Low-Ratio Mortgages
Any mortgage in which the downpayment is less than 20% of the amount borrowed is considered a high-ratio mortgage. High-ratio refers to the 'loan to value' ratio or LTV and assumes that the property's value is the same as what you've paid for it. Anything more than a 20% downpayment and the LTV is considered low-ratio. So you understand the math now. But what does it mean to have a high-ratio mortgage or a low-ratio mortgage?
The Difference Between Insured and Uninsured Mortgages.
A protectionary practice required for mortgages in Canada is that high-ratio mortgage holders must pay for mandatory mortgage insurance through the Canadian Mortgage and Housing Corporation (CMHC). Mortgage insurance protects the lender in the event that you default on your payments. CMHC is a crown corporation established after World War II to assist veterans returning from war in finding housing. Since then, CMHC has expanded its mandate to help all Canadians gain access to housing. CMHC mortgage insurance does not come without a cost. You'll end up paying between 1.7% to 4% in insurance premiums for an insured mortgage. Premiums are calculated based on the LTV ratio of your mortgage, so the more you put down, the lower your insurance premiums will be. Mandatory insurance may seem like a negative. However, insured mortgages are a safer bet for lenders, so they tend to offer lower interest rates than uninsured mortgages. That's better for you!
Implications for the Mortgage Stress Test
When applying for a new mortgage, your application is subjected to the mortgage stress test to assess the risk to you and the lender if interest rates were to rise while your income stayed the same. The mortgage stress test applies to all new mortgages but in slightly different ways. For low-ratio mortgages (20% downpayment or more) or uninsured mortgages, and the maximum rate used in the stress test calculation is higher than for high-ratio, insured mortgages. Taking all of this into account, how much should you aim to put down when you purchase a home?
How Much is Enough?
The answer is convoluted and depends on several factors, not the least of which is how much money you can access for a down payment. Many people use savings, cash in other investments to source their funds for a down payment. The Canada Revenue Agency allows first-time buyers to take out a tax and interest-free loan against their RRSP savings to be used for a down payment. Still, others draw down on the bank of Mom and Dad to make their downpayment.
When you make the decision to buy a new home, do some budgeting and talk to a mortgage expert to help you figure out how much you'll need for a downpayment for what amount you can be pre-approved. The ratio of your downpayment to the value of the home can impact mandatory insurance premiums, the likelihood of getting final approval and even the interest rates lenders are willing to offer. A professional mortgage broker can help you understand all of the factors and make the right decisions for your financial situation.