The almighty DOWN PAYMENT – much of what happens with your monthly costs and amortization period are tied to this number.
All lenders will expect you to put some cash towards your home purchase. Here are some quick facts about down payments:
- the minimum down payment needed in Canada is 5% of the purchase price
- down payments ranging from 5-19.99% purchase price are considered to be high ratio loans, and are therefore subject to mortgage insurance, according to the Bank and Trust Company Acts
- mortgage insurance is calculated based on the size of down payment
|Loan to Value||Premium on Total Loan Amount||Premium on Increase to Loan Amount for Refinance|
|Up to and including 65%||0.60%||0.60%|
|Up to and including 75%||0.75%||2.60%|
|Up to and including 80%||1.25%||3.15%|
|Up to and including 85%||1.80%||n/a|
|Up to and including 90%||2.40%||n/a|
|Up to and including 95% - traditional down payment||3.60%||n/a|
|Up to and including 95% - non-traditional down payment||3.85%||n/a|
Essentially this means the more money you save, the lower your monthly payments will be. Your down payment also counts toward equity in your home. It is important to know, that should a home be foreclosed upon, the equity in the home goes to the bank; therefore the larger the down payment, the more protection the banks have.
Sources of Down Payment
Lenders will require proof of down payment prior to approving a loan. Down payments can come from three sources:
- Personal Savings – If you are going to use personal savings for a down payment, it is ideal to have the money in the appropriate account no less than 30 days prior to applying for a mortgage, as this will allow time for the appropriate bank statements to be processed.
- A gift from a family member – In order to use money given to you as a gift you must provide a gift letter signed by the family member providing the money for down payment. In addition, the appropriate bank records to show either the deposit of the gift money into an account owned by you, or proof of the money an account owned by the family member.
- RRSP equity – The RRSP home buyers plan allows first-time home buyers to withdraw amounts from a Registered Retirement Savings Plan (RRSP) to purchase or build a home without having to pay tax on the withdrawal. As of 2oo9, the maximum withdrawal limit is $25,000. For more information on the RRSP Home Buyers Plan click here.
Any combination of the three above can be used in conjunction with each other to raise the required amount of money to afford a down payment. If you are unable to raise a down payment, it may be possible to complete a flex-down payment, however this is undesirable as you will be charged hefty financing charges.