Are you prepared to purchase a home? The down payment is a significant upfront cost when buying a house, and the more you allocate towards it, the lower your fees and interest payments will be over the lifetime of your mortgage. Do you have enough funds saved to secure the mortgage you require? What is the minimum down payment required to purchase a home in the price range you are looking at? After reducing your debt and saving for a down payment, you’re then ready to move forward with purchasing your first property.
If you have questions about the mortgage process or your down payment options while reading this guide give me a call and let’s talk.
Understanding the down payment on a home
To begin with the fundamentals, a down payment for a mortgage refers to a one-time payment made when buying a home. The size of the down payment can influence the mortgage amount that you are eligible for. It assists lenders in deciding the maximum mortgage loan they can approve you for and the type of mortgage that suits you. The down payment is deducted from the total home purchase price, and the outstanding balance is provided to you as a mortgage loan which you pay back over a set period of time.
Breaking down the percentage of a down payment
You may have heard you need a 20% down payment on a home though some might only need a 5% down payment depending on their financial situation. Both are common amounts you want to aim for but, both also have significantly different impacts on your mortgage overall. And, there are other options to consider. The minimum down payment required depends on the property’s value that you intend to purchase. Let’s delve into the details so that you can decide how much your down payment should be.
For properties priced at $500,000 or less, the minimum down payment is 5% of the purchase price.
If the property’s price falls between $500,000 – $999,999, the minimum down payment is 5% of the first $500,000 of the purchase price and 10% of the amount exceeding $500,000.
For properties priced over $1 million, you must provide a down payment of at least 20%.
If you’re self-employed, you may need to provide a higher down payment based on your specific circumstances and income documentation. Every mortgage pre-approval is different based on your personal circumstances, and working with a reputable mortgage broker will help you secure the best mortgage options and rates in the process.
Is it better to put a larger down payment on a home?
A larger down payment typically results in long-term savings on interest and other fees, plus it provides more equity in your home right away which helps you qualify for lower monthly mortgage payments.
Nevertheless, an excessive down payment can have an adverse impact on your finances and savings. If it strains your finances, you should consider putting down a smaller amount. It’s not necessary to drain your cash flow, and you don’t want to feel mortgage broke either.
It’s also important to remember that the down payment is not the only expense you need to worry about when purchasing a home. You also need to consider closing costs, moving expenses, insurance costs, and other monthly bills on top of buying furniture if it’s your first home.
So, in terms of the burning question “Is it better to put more money towards your down payment?” Yes, but only if you can afford it without jeopardizing your financial situation.
How to save up for a down payment:
In the current Canadian real estate market, having enough savings for a down payment is the biggest hurdle to obtaining mortgage approval. If you find yourself short on funds for a down payment, don’t worry! There are several ways to continue saving and reach your goal of homeownership.
Your first step should be setting a savings target. Determine how much you need for a down payment and how much you need to save to reach that goal. Crunch the numbers and establish a clear savings goal.
Next, create a timeline and decide on a monthly savings amount that will help you reach your target. To make savings automatic, set up an automatic withdrawal on each payday. Additionally, try to reduce unnecessary expenses to save even more. Instead of going out for lunch, prepare meals at home, and make coffee at home instead of purchasing it. While it may be challenging to change your lifestyle, these minor changes can significantly increase your savings.
Alternative options to affording your down payment
As a homebuyer in Canada, you have several options available when it comes to financing your down payment. These are a few common choices you can consider:
Insured or low down payment mortgage: If you don’t have the full 20% saved up for a down payment, you can still qualify for a mortgage by applying for mortgage insurance as a top-up. However, keep in mind that you will end up paying more in interest with this type of mortgage and it can take longer to pay off your home.
Home Buyer’s Plan (HBP): The Home Buyers’ Plan (HBP) is a program in Canada that allows first-time homebuyers to withdraw up to $35,000 ($70,000 for couples) from their registered retirement savings plan (RRSP) to use towards their down payment on a home. The amount withdrawn is tax-free as long as it is repaid back into the RRSP within 15 years. This program can be a helpful option for those who are having difficulty saving up for a down payment on their own. However, it’s important to consider the long-term implications of withdrawing money from your retirement savings and to make sure that you have the plan to repay the amount withdrawn back into your RRSP within the required timeframe.
First-Time Home Buyer Incentive Program: The First-Time Home Buyer Incentive Program is a government program in Canada that helps eligible first-time homebuyers reduce their monthly mortgage payments without increasing their down payment. The program provides a shared equity mortgage with the Government of Canada, which means the government shares the upside and downside of the property value.
Under the program, eligible first-time homebuyers with a household income of less than $120,000 can receive a 5% or 10% shared equity mortgage. The amount of the mortgage incentive will depend on the property being purchased and the down payment amount.
The incentive is interest-free and requires no ongoing payments, but it must be paid back either when the property is sold or after 25 years, whichever comes first. Homeowners can also choose to pay back the incentive in full at any time without penalty.
First Home Savings Account: A first home savings account (FHSA) is a registered plan allowing you, as a prospective first-time home buyer, to save for your first home tax-free (up to certain limits) and you will be able to open this FHSA starting April 1, 2023.
The new policy will allow new home buyers to save up to $40,000 on a tax-free basis. The annual maximum contribution to the account is $8,000 per year.
It’s tax-free coming in, and tax-free coming out!
Ready to apply for a mortgage? I can help!
If you’ve decided it’s time to apply for a mortgage and want to find out what the best possible mortgage rate you can get is, I’m a professional mortgage broker in Barrie with over a decade of experience. With my financial advisor background, I can also provide suggestions on how to save more for a down payment and how to optimize your cash flow throughout the lifetime of your mortgage.
No matter what your mortgage questions are, I’m here to answer them. Don’t hesitate to ask, as no question is too trivial. I believe that knowledge is power and I’m committed to helping you every step of the way.
If you’re ready to get started with your mortgage application, you can begin by filling it out HERE. But if you still have some inquiries before beginning, please don’t hesitate to give me a call at 705.315.0516. Let’s work together to make your dream of owning a house a reality!