A down payment is the portion of the purchase price that the homebuyer furnishes. The balance is then obtained from a financial institution in the form of a mortgage. However before you go house hunting, you should first consider what type of down payment you would like to put towards a house. Below you will find some of the most commonly used down payment options.
This type of mortgage requires the home buyer put down at least a 20% down payment and the mortgage rate is offered at either a fixed or variable basis. This mortgage does not carry any type of high-ratio or lender insurance premium.
Using Your RRSP as a Down Payment
Under the federal government’s Home Buyer’s Plan, first time home buyers are able to use up to $25,000 in RRSP savings per person($50,000 for couples) on a down payment for a home. This can be used to make a down payment on your home without any penalty. There are a few things to note with using your RRSP. You must begin to repay the funds two years after the funds have been withdrawn. This withdrawal is not taxable as long as it is repaid within a 15-year period. To learn more about the Home Buyer’s Plan and using your RRSP talk to your financial advisor today.
Larger Down Payment
Your main for a down payment should be to save as much as possible and use this amount towards a down payment. It is a huge advantage to put down as much money as possible for your down payment. Interest costs on a smaller mortgage are lower, this then adds up to a more significant amount of savings in the long run.
Also be sure to keep some money in a reserve, as you should be prepared for other costs and expenses that might come up including: home inspection, closing costs, moving and other potential expenses.
Low Down Payment Insured Mortgage
This option allows Canadians who might not have the ability to purchase homes access to the Canadian real estate market. Mortgage default insurance or commonly known as CMHC Insurance, is mandatory in Canada for down payments between 5% and 19.99%. This insurance protects the lender in the event of the borrower stops making payments and defaulted on their mortgage loan.
Mortgage Default Insurance is a one time premium paid when your purchase closes. It can be paid in a single lump sum or added to the principal amount of the mortgage.
However there are some requirements that need to be met before qualifying for Mortgage default Insurance:
- The maximum amortization for insured mortgages is 25 years
- If the purchase price is between $500,000 – $999,999 a higher down payment is required. The minimum down payment is 5% of the first $500,000, and 10% of the remaining amount.
- Mortgage default insurance is not available on homes purchased for more than $1 million; this means that a 20% down payment is required on these homes.
Thinking about which option works best for you? Give me a call today and let me find out which mortgage down payment option works for you!