For many, saving for a down payment is one of the biggest roadblocks to becoming a homeowner. In today’s economic climate, saving money is challenging to say the least. Every month we try to put something away despite our normal expenses and it still seems like there is always something that will pop up and eat into our savings. Many people believe, “Real estate prices are so high that I will never be able to save 20 per cent, so I will never own a home”.
Putting less than 20 per cent down:
A mortgage on a property that has less than 20 per cent owner equity (or down payment) is called an insured or high-ratio mortgage. It is entirely possible to purchase a property with under 20 per cent down, but in this case you are required to pay insurance to protect the lender against default. This means that if for whatever reason you as the borrower are unable to make your payments as per the mortgage commitment (or contract), the institution that you borrowed from does not risk losing any money should they have to sell the property to regain the loaned amount.
There are three providers of this kind of insurance — Canada Mortgage and Housing Corp. (CMHC), Genworth Financial Canada and Canada Guaranty. * This program allows home buyers to make a purchase without saving a full 20 per cent.
When people are faced with the idea of paying more for an already expensive item, they are turned off. It is true that the extra money that you pay for this insurance, as with any insurance, does not contribute to the equity in your property, meaning you will never see that money again. But just as you are paying extra in interest to borrow the actual mortgage amount, you can get into a home sooner by paying for the insurance to insure a high-ratio mortgage.
So, before you decide that you will be a renter for the rest of your life, let’s look at the numbers. First, let’s establish the absolute minimum amount you can put down on a purchase. If the purchase price of the property is less than $500,000, the minimum down payment is five per cent ($25,000).
If the purchase price is over $500,000, the minimum is five per cent of the first $500,000 and 10 per cent of the remainder (for example, a $750,000 purchase price would warrant a minimum $50,000 down). For purchases over $1 million you must have a 20 per cent down payment – no exceptions.
Now that we’ve established what a minimum down payment looks like, let’s look at insurance premiums. The smaller the down payment, the higher the premium. What the chart shows is the percentage of the total loan amount that you will be charged as an insurance premium depending on the amount you put down. This means that the most you can be charged is four per cent and that would happen when you have a down payment of between five per cent and nine per cent.
Keep in mind, with a 20-per-cent down payment you are not obligated to insure the mortgage, but it is included in the chart to add perspective.
So, if you were to put five per cent down on a $500,000 purchase, you would be paying $19,000 in insurance over the term of the mortgage. Ten per cent would be $14,725, and 15 per cent would be $13,300. This can be paid in installments as part of the mortgage payment, or as a lump sum up front. The amount that you pay in insurance can be added to the amount you will pay in interest for borrowing the total loan amount and is usually referred to as the cost of borrowing.
This means that your monthly payment for a $500,000 purchase with five per cent down and a five-year fixed rate of 2.69 per cent would be around $2,260 (including your CMHC insurance payments).
Where is your down payment coming from?
It’s likely that you have worked very hard to accumulate your savings between a few accounts such as TFSAs, RRSPs and various savings or chequing accounts.
Did you know that since the 2019 federal budget, a first-time home buyer can take up to $35,000 out of their RRSPs tax free to put toward their down payment?
The most important advice that I can give here is to keep your money where it is. It would seem like a logical plan to consolidate the money you’ve saved up into one account for ease of transfer. Although this is true, it will not negate the fact that the lender will most likely want to see a history of where that money came from.
This obligation comes from the Canadian Anti-Money Laundering laws, which require your down payment to be accompanied by a paper trail that shows that your funds had been accumulated in a way that is traceable and not indicative of criminal activity.
If you were to move your down payment into a single account, part of my job would be to request statements showing up to a 90-day history of the accounts from which those funds came. It is an extra step that need not be taken, and in order to avoid the extra paperwork I would advise to move your money as little as possible in the months and weeks leading up to your purchase.
As well as accumulating down payment in your savings, there are those of us who are fortunate enough to be receiving assistance from family or close friends in the form of a gift.
Gifted down payment:
When you are receiving a gift in the form of down payment assistance for the purchase of your home, there are a few things that should be considered. The most important of these is the inclusion of a “gift letter”.
The gift letter is an official statement declaring that the funds being transferred to the purchaser are an entirely non-repayable gift for the purpose of contributing to the down payment of the purchase of the subject property.
What is important to know here is that, just as with any other part of the down payment, the account history of where the money came from may need to be looked at. The individual gifting the money may need to provide a history (up to 90 days) of where the funds were before they were gifted and how they were accumulated.
The CMHC-funded down payment incentive program for first-time buyers:
CMHC launched its first-time buyer incentive this week. Essentially it is a shared equity program designed to help qualifying candidates to reduce their loan amount by providing the purchaser with an interest-free loan to be paid back after 25 years or when the property is sold. CMHC will assist with an amount equal to five per cent of the purchase price of existing homes, and 10 per cent of a new build.
To qualify, your household income must be less than $120,000 and the total borrowed amount on the purchase (including the incentive portion) cannot exceed four times your household income amount. This means that with a household income of $120,000 your maximum purchase price would be approximately $505,000 with a five-per-cent down payment, or $565,000 with a 15-per-cent down payment.
This could be beneficial because it will help to decrease your loan amount, monthly payments and overall interest you pay on your loan. Additionally, the incentive is interest-free and repayable at anytime without penalty. The repayable amount is relative to the market value of your property, so if your property happens to decrease in value, the amount owing to the CMHC will decrease accordingly. If the property value increases, CMHC will share in the appreciation.
Source REM - Sept 2019