You're browsing real estate on the web, and OMG! There it is—your dream home, right there on the screen. You can already see yourself living there, lounging on the deck with the love of your life, the dog, and the baby you're planning to have.
But can you afford to buy it? And where will your down payment come from?
As you know, a down payment is a cash amount you pay towards the purchase of a house. What you may not know is how much you'll need. Is there a minimum amount? Some people will tell you that you only need to put down 5% of the value of the home, while others will assure you that it's actually 20%. We've done a bit of research for you. Here's what we learned.
Ideally, your down payment should be 20% of the cost of the home. But let's be realistic: how many first-time buyers have $70,000 in their savings account?
I'm sure you'll agree, it's not many. Fortunately, as long as the property costs less than $500,000, you can make a minimum down payment of just 5%. But you will need mortgage loan insurance coverage.
It's insurance, generally provided by the Canada Mortgage and Housing Corporation (CMHC) that protects the mortgage lender in case you have some trouble repaying your loan. Even though it doesn't provide protection for you, it's required for down payments under 20%. The insurance premium is added to your mortgage loan payments.
Home purchases over $500,000 require you to put more money down. The minimum is 5% of the first $500,000 and 10% of the remaining amount. For example, if your house costs $600,000, you'll have to put down 5% of $500,000 ($25,000) plus 10% of the remaining $100,000 ($10,000). The minimum down payment to buy this house would therefore be $35,000.
What you need to remember is that the bigger the down payment, the lower your insurance premium will be and the less interest you'll have to pay over the coming years. That said, given the rapid increase in housing prices, would it be smart to spend the next 10 years saving up for a $100,000 down payment? Not really. Especially because if you're organized, you can save enough to make a more modest down payment in not much time at all.
To start, you need to determine precisely what your situation is: how much do you need to borrow to purchase your home? Our calculators will help you determine your borrowing capacity—and don't forget that our advisors are here to help! The calculators can give you a general idea, but they only look at one aspect of your borrowing capacity.
Now let's take a look at three common ways to come up with a down payment.
Have you heard of the HBP, or Home Buyer's Plan? Basically, it's a program that allows you use some of what you've already saved in your RRSP to buy your first home. You can withdraw up to $35,000 ($70,000 per couple), without paying interest or taxes.
This amount can be used for your down payment or to cover costs related to buying the property (notaries and home inspectors don't come cheap—and have you seen how much moving companies charge in July?).
To ensure everything runs smoothly (and the rules are respected), the amount withdrawn must be repaid into your RRSP over the next 15 years. Any amount you don't repay will be added to your income for tax purposes (meaning more taxes for you to pay).
Be sure to plan your repayment strategy with an advisor. To benefit from the HBP, you've also got to buy a home by October 1 the year following the withdrawal.
Another simple and effective strategy is saving. But that can be easier said than done! You start setting a little aside, do it a few times, but then life gets in the way and you forget. And then you don't start again.
Consider setting up automatic debits to keep your savings on track. You'll never have to think about your savings again. Another bonus: You'll get used to tightening your belt and rethinking your priorities, which will serve you well as a mortgage holder!
We recommend saving systematically. Set up a monthly debit from your account that matches the difference between your current rent and what you'll have to pay once you take out a mortgage loan.
In other words, if your current rent is $900/month, but you expect to be making monthly mortgage payments of $1,600 in the near future, take the difference ($700 in this case) and put it into your savings. You'll be saving and getting used to covering the amount of your mortgage payments at the same time. After one year you'll have saved $8,400, and if your partner does the same thing, you'll have combined savings of nearly $17,000/year.
This can be a delicate subject, but getting part of an inheritance early can be a great way to supplement your down payment. In fact, when you're looking for your dream house or condo, a gift will greatly reduce your monthly payments over 25 years. Maybe you could ask your rich uncle, or your friend who just won the lottery. Of course, we can't all be so lucky!
What if your retired parents decide to downsize to a condo downtown (it's never too late to become a hipster)? That means they might be able to sell the family home to you while gifting you a portion of the home's value. For example, if the home is worth $500,000 and your parents decide to sell it to you for $300,000, that's a gift of $200,000 in principal, which reduces the mortgage financing required to $300,000: GREAT!
Did you know that since September 2019, the Canadian government has offered a First-Time Home Buyer Incentive through the CMHC? This incentive supports first-time homebuyers by letting them borrow a percentage of the value of their first home for their down payment.
There are two options:
That means your mortgage loan will be lower. That's one less financial burden! And you won't need to pay it back right away, or even on a monthly basis. You'll only have to pay back the incentive after 25 years or when you sell your home, whichever comes first. You can repay the incentive in full any time without any mortgage prepayment charge. Keep in mind that the amount you'll owe is based on the property’s fair market value at the time of repayment.
The bottom line: There are lots of options available to you for buying a home. Just be sure to plan your strategy well and talk to our experts for advice!
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