When it comes to buying a house, the concept of a down payment is pretty straightforward. Prospective homeowner pays a percentage of the selling price up front, and then they have a smaller mortgage and will have lower monthly payments.
Of course, concept and reality are two different things, and getting the down payment you want or need may be more challenging than you thought. Here is some information to illustrate how much of a difference a down payment can make and what amount is the right amount.
Conventional vs. High Ratio
The amount of your down payment will determine whether you have a conventional or a high ratio mortgage. With a conventional mortgage, your down payment is at least 20 percent of the purchase price of the home. With a high ratio mortgage, the down payment is less than 20 percent of the purchase price of the home.
For high ratio mortgages, the mortgage must be insured by a third party like the Canada Mortgage and Housing Corporation. This added insurance will also carry an insurance premium that will add to your monthly expenses. The amount of the insurance premium you have to pay depends on a few different factors such as the actual down payment percentage and the amount of the mortgage. The premium may be added to the principal balance or paid in a lump sum.
Where to Find a Down Payment
Prospective homebuyers find their down payments from various places. Some will use inheritances or savings, some will use RRSP savings and some will take out personal loans or lines of credit to put down as a deposit.
The RRSP home down payment option has rules that must be followed, and taking out another form of credit to pay make the down payment will add to your monthly expenses. Naturally, saving the money yourself and using cash is the best way to go, but it isn't always the realistic way to go.
For most people, saving up $50,000 or $60,000 or more could take years, and they aren't willing to wait that long. Luckily, lenders and real estate agents are aware of this and they usually do what they can to help the process along and get you into a home.
Your Down Payment Goal
The minimum 20 percent down payment that's required for a conventional mortgage is probably what most experts would consider a "healthy" down payment. It eliminates the third party insurance scenario and makes a good dent in the overall purchase price. With a lower mortgage, the savings in interest costs over the years can add up to significant savings.
A minimum down payment of 5 percent may be tempting when you sense the freedom of home ownership, but your goal should be to save as much as possible to add to your down payment. The 20 percent ideal is great, 25 percent is even better. Take some time to work out the numbers and you will see just how much you can save over the term of the mortgage, by making it smaller in the beginning.
Of course, concept and reality are two different things, and getting the down payment you want or need may be more challenging than you thought. Here is some information to illustrate how much of a difference a down payment can make and what amount is the right amount.
Conventional vs. High Ratio
The amount of your down payment will determine whether you have a conventional or a high ratio mortgage. With a conventional mortgage, your down payment is at least 20 percent of the purchase price of the home. With a high ratio mortgage, the down payment is less than 20 percent of the purchase price of the home.
For high ratio mortgages, the mortgage must be insured by a third party like the Canada Mortgage and Housing Corporation. This added insurance will also carry an insurance premium that will add to your monthly expenses. The amount of the insurance premium you have to pay depends on a few different factors such as the actual down payment percentage and the amount of the mortgage. The premium may be added to the principal balance or paid in a lump sum.
Where to Find a Down Payment
Prospective homebuyers find their down payments from various places. Some will use inheritances or savings, some will use RRSP savings and some will take out personal loans or lines of credit to put down as a deposit.
The RRSP home down payment option has rules that must be followed, and taking out another form of credit to pay make the down payment will add to your monthly expenses. Naturally, saving the money yourself and using cash is the best way to go, but it isn't always the realistic way to go.
For most people, saving up $50,000 or $60,000 or more could take years, and they aren't willing to wait that long. Luckily, lenders and real estate agents are aware of this and they usually do what they can to help the process along and get you into a home.
Your Down Payment Goal
The minimum 20 percent down payment that's required for a conventional mortgage is probably what most experts would consider a "healthy" down payment. It eliminates the third party insurance scenario and makes a good dent in the overall purchase price. With a lower mortgage, the savings in interest costs over the years can add up to significant savings.
A minimum down payment of 5 percent may be tempting when you sense the freedom of home ownership, but your goal should be to save as much as possible to add to your down payment. The 20 percent ideal is great, 25 percent is even better. Take some time to work out the numbers and you will see just how much you can save over the term of the mortgage, by making it smaller in the beginning.