Sunday, 14 June 2015

Down Payments 101

Today's Lesson: Down Payments

Saving your down payment for a new home or investment can be one of the most diffcult parts of the entire process. Let’s be honest, it can be tough to put aside that much money and not have anything to show for it, yet.

There are a few things you should keep in mind, however. The more money you put down the better your chances are of getting a mortgage, and hopefully a great rate to go with it. Both the lenders and mortgage insurers(CMHC, Genworth, Canada Guaranty), all look to your down payment as an indication that you are capable of saving and are serious about purchasing that particular property.

 Can I Use A Gift/Borrowed Funds?

Many people will be able to use the option of a gifted down payment from someone in your immediate family. This can include parents or grandparents, and it is becoming increasingly common for parents/grandparents to help their children purchase their first home or help young growing families to up-size into larger homes. As many as 40% of first-time buyers use gifted or borrowed money for some or all of their down payment.

How Much Down Payment Do I Need Then?

The truth is that as of writing this article it is still possible to purchase an owner-occupied home with almost no money down. Purchasing property for investment will generally require at least 20% down, but there are some creative options to be explored if this is your intention. Investment properties present unique challenges and you should always consult a mortgage professional to understand all available options.

With regards to standard(pre-existing) home purchases, down payment amounts usually work out something like this:

Insured Mortgages:

Mortgages which have less than a 20% down payment fall under the category of "Insured" mortgages. This means that you will be required to pay for mortgage default insurance through either CMHC, Genworth, or Canada Guaranty as part of your mortgage. The cost can vary as can the details, please visit my blog post on Mortgage Insurance for a more thorough explanation of this product and why you may need it.
0-5% Down:
There are currently lenders who will accept a down payment that is completely borrowed, so long as you have at least 1.5% of your purchase price to cover your closing costs(Lawyer, PTT, etc.). This is, however, a good option only for those clients who have exceptionally good credit, good income, and can show an explanation as to why they want/need to borrow their down payment. Examples of people who may qualify for this are students who have recently finished school and have nearly or completely paid off any student debts, or anyone else who has good income and credit but has not had time or opportunity to save up a larger down payment.
5%-9.99% Down:
5% is a very common amount of money to put down on a primary residence(Especially commong with first-time buyers). Most lenders will consider this a good place to start, and some will even consider 5% enough to purchase a second home or vacation property. This can also be a great option for parents sending their children to university and who would like to invest in a purchasing a property for for the child. A parent could purchase a property with only 5% down, giving the student will have a place to live during school.
10%-14.99% Down:
A similar scenario to above, but putting 10% down can be a way to improve your chances of finding a good rate and solution if you have a lower credit score, or not a lot of credit history
15%-19.99% Down:
Almost have enough funds for a “conventional”(i.e. 80% LTV or less) mortgage, but not quite there yet? Not to worry,  CMHC, Genworth, and Canada Guaranty all have solutions for you as well.

Conventional Mortgages

20% or more Down:
If you are able to put 20% or more of your purchase price down, your mortgage is considered to be a “conventional” mortgage. This doesn’t necessarily mean that your mortgage won’t be insured though as some lenders still require this, but it usually means that you are not the one paying for the insurance premium. Having more than 80% equity in your home also opens up a world of flexible and creative mortgage options ranging from debt consolidation, to refinancing for equity take-outs, to Home Equity Lines of credit and creative options for tax and retirement planning.

As you can see, something as simple as how much down payment you provide can be a difficult, complex process. It is important to sit down with a mortgage professional to discuss your choices and to see which mortgage solution will fit into your life and financial plans.


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