Ready to purchase your dream home? You’ll be pleasantly surprised to know that you won’t need to offer the entire cost up-front.
Instead, thanks to the option of mortgage financing, you can offer up a down payment and get started on building your equity. But, how much down payment will you need? And how will the amount affect your mortgage rates?
For most Canadians, in order to secure a mortgage loan, most financial providers–whether a bank or private lender–will need to confirm that you have a down payment. Defined as a lump-sum of money paid up-front, the down payment is a percentage of the overall price of the home, with the rest of the cost being covered by a mortgage.
When your offer to purchase a home is accepted by the sellers, you’ll need to put down a deposit to indicate that you are serious about following through.
Generally, this deposit is a sum of money that is paid upfront and on average is about 5% of the offer price, in the form of a certified cheque or bank draft.
Consider the deposit a down payment on the down payment. Once the sale officially goes through, the amount of your deposit is deducted from the down payment.
Given that a down payment is calculated as a percentage of the total costs of the home, the rule of thumb is:
While there’s a silver lining knowing that, depending on your price point, you won’t have to fork over an automatic 20% down payment, it’s important to note that if you do give less than 20% you will need to get mortgage insurance to qualify.
You might not have known this, but mortgage rates can change depending how much down payment you have available.
According to the Canada Mortgage and Housing Corporation, a mortgage with less than 20% is considered “high ratio.” If the house you’re purchasing is less than $1 million, you’ll need to also get mortgage insurance with this down. In this situation, mortgage insurance doesn’t protect you, but instead protects the lender in case you’re unable to make your payments.
While this will add premium payments to your monthly mortgage costs, lenders are more willing to offer some of the best–and in most cases lower–interest rates.
While you might avoid paying mortgage insurance when you offer a minimum 20% down payment, because the lender isn’t protected by the CMHC if you stop making your payments, there is a bit more risk for said lender. That’s why, in this situation, rates are just slightly higher with this down payment.
The higher your down payment is, the lower your lender risk goes, putting you closer towards the mortgage rates seen for “high ratio” purchases. For some lenders, 25% down payment gets you very close to their lowest rates, while others require 35%.
How do you decide if you should put down a larger or smaller down payment?
Overall, a larger down payment means you’re borrowing less money, which means you’ll pay less in total interest costs over your mortgage’s lifetime. Not only does saving for a larger down payment help you save overtime, it also offers you:
Obviously the best pro about a smaller down payment is that you don’t have to save up as much, making it possible for you to:
At the end of the day, the down payment you offer has to make sense for you and the home you’re looking to buy. But if you need more help figuring out what’s best, our Pine mortgage experts are always here to help.
Apply through our easy-to-use application and we’ll put you in touch with one of our agents to help you with your down payment questions and home-buying journey.