The down payment aspect of purchasing a property will depend upon a range of factors that can determine the overall percentage. The property value will also determine the minimum legal requirement for a down payment, i.e. for properties at or over $1 Million a 20% down payment is required. A legal minimum of 5% down payment is mandated for all houses purchased in Canada at $500K and under.
With the national average home price being around $703,446 in Canada, it is important to set a savings goal for your down payment and work with the right lender who can understand your requirements. There are also shared equity programs that can help you split the cost of the down payment in exchange for equity. Lenders can own a percentage of the property, allowing you to gain more favourable interest rates and mortgage terms.
You can explore a range of options when it comes to financing for your dream home, by working with the right brokers. A down payment calculation can also be done in consultation with a qualified broker through sHelto. You can understand the impact of the down payment on your potential interest rate, terms, long term monthly mortgage payments, and other considerations.
What factors determine how much down payment is recommended?
There are several factors that go into how much of a down payment is required and recommended. Apart from the minimum legal requirements, the purchase price, the mortgage lender agreement, the down payments schedule, and other factors can dictate how much of a down payment is ideal.
When understanding the recommended minimum down payment for a house, it is better to consider all factors that go into the decision making process.
Property value
The overall property value of the house will dictate how much down payment is recommended and legally mandated. For properties at or over $1 Million, the down payment will be 20% or more as mandated by the Canadian government. The price of the home will determine the down payment on a home, which is why it is best to review multiple options.
Mortgage eligibility
Your mortgage eligibility, which depends on your annual income and debt service ratios, will impact what kind of property you can purchase and its associated down payment requirements. Your lender will be able to review your Gross Debt Service (GDS) and Total Debt Service (TDS) to gauge your eligibility. You can reach out to a non-traditional financial institution as well, to understand borrowing options and private mortgage insurance.
Mortgage loan insurance
The CHMC mortgage insurance is another cost aspect to consider, when purchasing a property. By putting down a larger down payment, you can remove CMHC out of the total mortgage. You may also have to review the mortgage loan insurance premiums, the mortgage default insurance costs, and other aspects related to home insurance as well.
Budgeting
Your overall budget will determine what kind of a down payment is ideal for you. If your monthly outflows are tracked and organized, then you can review various monthly payment schedules to determine what works best. You can determine the minimum down payment required per your calculation and work ahead from there.
Interest rates
There are several options in terms of interest rates when it comes to different terms and property prices. While the home’s purchase price will dictate the interest rate and the terms, you can still opt for interest rate combinations that work for you. The interest rate offered will also change based upon your down payment and purchase price, which is why checking with multiple lenders will be recommended.
Mortgage structure
The mortgage structure will also impact your monthly mortgage payment and your mortgage down payment. The structure, type, and length of your mortgage will dictate how much of a mortgage down payment is ideal. You can consult with a broker about lending options and understand whether novel equity split options are also available.
Closing costs and additional fees
There are closing costs and other associated fees involved with purchasing a property. You would have to capture these costs into your budgeting for the down payment so that you can increase your equity and lower your mortgage obligations.
Potential for refinancing
Having lower equity in your home can make it more difficult to apply for refinancing from a lender. Even if you’re applying for HELOC or other forms of equity to value products, you would still need adequate equity in your own property. This can be significant earlier on, when you’re planning on renovations, fixes, and other considerations.
Should I only put down the minimum down payment on a house?
It is ideal to put down a higher down payment amount, generally around 15-20%, so that you can get a better rate and term for your mortgage. You can also put down a minimum of 5% but you may get lower initial equity of the home and a higher interest rate in many cases.
You should also consider other parameters such as budgeting, additional costs, monthly mortgage payments, etc. These can be vital to review for your unique case, and understanding how best to choose the right down payment amount.
While in many cases a higher down payment is ideal, you can also opt for a lower down payment amount to enter the home ownership market sooner. You can start with an equity shared model, which can help you increase your down payment total, with the help of the lender who is providing the capital.
Here’s how you can save up for a down payment for your property
The best approach to understanding how to save up for a down payment is to speak to a broker. They can provide the necessary insights on how to save up for the right type of a property, based on key requirements and recommendations.
Focusing on down payment goal
The right strategy is to focus on a down payment goal by increasing income and reducing discretionary spending. You can focus on a specific type of investment goal for your property, which can help in increasing your down payment size for your dream home. You can wait a year prior to investing to boost your down payment amount further.
Home buyer programs
The Canadian government offers home buyers various down payment assistance programs, such as credits and incentives under FSHA. You can withdraw up to $35000 towards your home purchase down payment, which can significantly improve your equity and allow you to own a home by tapping into your RRSP.
Lowering debt levels
It is best to lower your overall debt levels, so that you can make the monthly payments as per the mortgage term. You can lower your debt levels, which can automatically increase savings, as well as improve your credit history by having lower debt items. You can also be more credit worthy according to the calculations of debt and income by the lenders.
Improving credit score
You can focus on improving your credit score over time, giving you a better chance of securing a low down payment and lower interest rate mortgage. By improving the poor credit history, you can get mortgage pre approval faster at the right interest rate. This can happen when you make rectifications in your credit history and make payments on various loans.
