Buying your first home is a big deal. You’ve got your eyes on some properties, you know how much you can afford to pay each month, and you’ve already dog-eared at least fifteen different pages in the furniture section of the Ikea Catalogue. You’ve gone to your bank and been pre-approved for a mortgage loan so you know just how much money you’ll be allowed to borrow. But there’s still some key information you feel like you’re missing. What’s the next step?
Let’s start with the down payment.
How Much Should I Put Down?
For any property in Canada under one million dollars, you’re required to put down at least 5% of the price of the property. For anything over one million, you must put down at least 20% of the down payment by law.
There are also some exceptions to the 5% minimum rule; anyone purchasing a three or four unit dwelling as opposed to a single family or two-unit dwelling must make a down payment of at least 10%.
Anyone who puts down less than 20% on their down payment is also required to take out mortgage default insurance which protects the lender should the borrower be unable to keep paying for their home and default. Mortgages with down payments under 20% are known as high ratio mortgages while those who put down 20% or more fall under the conventional mortgage category.
Those who have high ratio mortgages and need to take out mortgage default insurance are insured by third parties such as the CMHC (Canada Mortgage and Housing Corporation), Canada Guaranty, or Genworth Financial Canada.
Does the Size of My Down Payment Affect My Mortgage Long Term?
How much (or how little) you use towards your down payment will influence four key things: the price of the home you can afford, how long your mortgage is, the amount of your monthly payment, and how much you have to pay for mortgage default insurance.
The larger the down payment, the smaller the mortgage. This means you have lower monthly payments, lower (or even no) mortgage default insurance costs, lower interest, and a shorter term mortgage overall.
Can I Borrow Money to Pay for the Down Payment?
Generally speaking, you must be able to afford the down payment yourself and the money must come from your own resources. Some of the more traditional ways of saving include taking a fixed amount from every paycheque and putting it aside or selling stocks/bonds/property. If you’re a first time home buyer, you can also take out up to $25,000 from your RRSP to go towards purchasing a home (tax-free).
If you don’t have the money readily accessible, there are some other options. Your down payment can be a gift from an immediate family member or relative (so long as it’s understood that it’s a gift, not a loan, and is not expected to be paid back). There are also some instances in which you can use borrowed money. If you use a non-traditional source for your down payment of 5% or less, you can expect to pay an insurance surcharge of 0.15%.
How Long Should My Mortgage Be?
In Canada, the maximum length your mortgage can be is 25 years. The most popular option is currently the 5 year fixed rate mortgage, but as housing costs rise, 10 year mortgages are steadily gaining traction too.
When deciding on a mortgage length, make sure to consider how much you can comfortably afford to pay a month. Your total debt shouldn’t exceed 40% of your gross household income and your total monthly housing costs shouldn’t be more than 32% of your gross household income.
Use this calculator to figure out what mortgage duration works best for your budget.