You’ve made the decision to purchase a new home. Congrats! Before you start exploring popular neighbourhoods, investment opportunities, and school districts, you first need to determine what exactly you can afford.
This may seem like a no-brainer statement, but do you know how to benchmark affordability as a homebuyer?
A down payment plays a key role in determining the amount you may qualify for. A down payment is the amount of money paid on your home up front with the remaining balance owing typically financed through a fixed or variable rate mortgage.
Home affordability and down payments are linked through the minimum down payment rules for homebuyers in Canada. Depending on the value of any home that catches your eye, a minimum percentage of that value must be paid before you can secure a mortgage and get your hands on the keys.
How is your minimum down payment determined?
The minimum down payment percentage required by homebuyers is determined by the home’s purchase price and can be separated into three categories:
1. A down payment of 5% is required on homes with a purchase price less than or equal to $500,000.
2. Homes with a purchase price between $500,000 and $1 million require a minimum down payment of 5% on the first $500,000 plus 10% on the remaining balance.
For example: If the home’s purchase price is $600,000 you would be required to pay 5% or $25,000 on the first $500,000, and 10% or $10,000 on the remaining $100,000. The combined total of your minimum down payment would be $35,000.
3. A minimum down payment of 20% is required for homes with a purchase price of $1 million or more.
Use our mortgage calculator to help you determine how much you may need for a minimum down payment.
Do you need to purchase mortgage default insurance?
Only if you have a high-ratio mortgage. High-ratio mortgages must be insured by the Canada Mortgage and Housing Corporation (CMHC), Sagen or Canada Guaranty. Like all insurance policies, you will be required to pay a premium based on the percentage of your home’s purchase price (between 4.0% and 2.8%).
The amount of your down payment will determine if you have a:
Conventional mortgage - Your down payment is 20% or more of the purchase price.
High-ratio mortgage - Your down payment is less than 20% of the purchase price.
Finding help for your down payment
If you’re looking for a little help coming up with your down payment, you may want to explore the Home Buyers’ Plan. The Home Buyers’ Plan allows you to withdraw $35,000 from your RRSP in a single year to put toward buying or building your home. The money is tax and interest free and your repayment period starts the second year after the year you withdrew funds. You have up to 15 years to repay what was withdrawn. Refer to the Government of Canada website to understand whether you are eligible.
What is the right down payment for you?
The answer to this question is unique to every homebuyer.
For some, keeping your upfront costs as low as possible might mean making a minimum down payment is desirable.
For others, it may be wise to put down more than the minimum required in order to influence your monthly payments, reduce the amount of mortgage insurance you may be required to pay, and to chip away at the principal owing.
And if you’re self-employed, you could be required to put down more than the minimums described in this article depending on your financial circumstances or work history.
No matter what, it’s always a good idea to speak to a Meridian Mortgage Specialist to find out what down payment will work best for you.