Buyer’s Guide – The Down Payment
Ok. This is the big one. The THOUSANDS OF DOLLARS one. DON’T FREAK OUT! You’ve got this! This is the amount of money you need to pay up front for your home. It’s going to be one of the biggest payments you’ve ever made at once.
After the down payment, you start making (much smaller) mortgage payments, so, yes, it does get easier. But first, you need to take care of that first one.
What does that take, you ask? Here are some answers to some of your burning down payment questions:
Question #1) How Much Do I Need?
If you’re buying your own home, you have a couple of down payment options. The first is the minimum standard: 5% of the total purchase price up to $500,000 and 10% of everything above that.
So, let’s just say you’re buying a property for $350,000. That means a minimum down-payment of $17,500. Remember – don’t freak out! That’s only 175 x $100 bills.
Just think about the money people can waste on coffee or that new crock pot thing that’s so trendy… You can find some $100 bills! (Just keep the money in a bank account – we’ll get to why).
The downside with option one is that you end up in an “insured mortgage”. That means that you have low enough equity (money of your own in the home) that the lender/bank will get insurance on the money they are lending by one of two organizations – CMHC (Canada Mortgage and Housing Corporation) or Genworth Canada. Insuring your down payment is actually mandatory and enforced by the Government of Canada. Why this is a downside is that you have to pay an insurance premium on top of your mortgage amount.
The second option is a down-payment of 20% or more. This is enough money that you are no longer required to be insured by CMHC or Genworth (as long as you are in or near a “major centre”) and don’t have to pay the insurance premiums. It also means your monthly mortgage payments will be lower, which is definitely nice!
Question #2) Where Can a Down Payment Come From?
Three options here: you can save it yourself, you can get it as a gift from a family member (there is some documentation required there), or you can borrow from your RRSP through the Government of Canada First Time Home Buyers Program.
Question #3) What Else Do I Need To Know?
I mentioned above that you should keep your savings in a bank account. That’s because lenders have to cross some T’s and dot some I’s around prevention of mortgage fraud. If your down payment hasn’t been in your account, or the account of the person gifting you money, the bank can’t use it to fund the mortgage.