What exactly is a down payment on a new home?
“Any lender wants you to have some of your money going into a home purchase alongside the lender’s money. That’s basically the function of a down payment,” says Geoff Parkin, president of the Vancouver-based Mortgage Brokers Association of B.C.
And, as with most payment programs, the more you put down the less you owe later. The federal law states that anytime you borrow more than 80 per cent of the value of a home, you have to be insured against default by one of Canada’s three mortgage insurance companies.
“So we add an insurance premium to the home buyer’s mortgage. So for that $400,000 home where you’re putting $20,000 down, you might have another $8,000 added onto your mortgage as an insurance premium.”
The premiums are calculated by how much your down payment involves starting at 80 to 85 per cent (of the total cost), then 85 to 90 per cent and then 90 to 95 per cent. “Obviously as you get higher, you’ve put less down on your down payment, the premiums go up,” says Parkin.
So how to calculate what you need to put down on that $500,000 three-bedroom home you’re in love with?
“Take the cost and multiply it by five per cent, and that tells you what your minimum down payment is,” says Donna Mullen, a broker/owner with Your Mortgage Store in Wasaga Beach, Ont.
In this case, you would put down $25,000. But as Mullen reminds us, that five per cent is only the minimum — even though there are programs available offering cash-back incentives to pay off personal debt.
That allows you to free up more money for the down payment and lets you virtually go through 100 per cent financing for your first home, keeping in mind you’ll pay the price in higher insurance premiums for at least the first five years of your mortgage.
“But five per cent is where you have to start from. If you have more to put down, that’s awesome because the more you put down, your mortgage insurance premium goes down and you save money.”
To keep that down payment in mind, Parkin suggests crunching numbers before you start house hunting.
“Always get preapproved for a mortgage before you go shopping — go through the math to see what you can afford, especially if the market is active,” he says.
While it’s best to minimize your debt load by using your own savings for a down payment, other options include a financial gift from a family member, combining your cash with money from an existing line of credit or tapping into your RRSPs.
The Homebuyer Mortgage Program lets you take up to $20,000 out of RRSPs without paying tax on it, if it’s for the purchase of your first home. “It’s for first-time homebuyers only,” says Parkin. “That can then be repaid over 15 years in equal instalments and there are no tax consequences.”
That’s on top of your amortization, or the number of years it takes you to pay off your mortgage — changes to the federal law in March dropped the length of amortization from 35 years to 30 years.