If you want to buy a house, understanding down payment requirements can make your plan more manageable.
A down payment is simply an initial payment you make towards the purchase price of real estate. In Canada, the minimum down payment required is 5 per cent of the purchase price if it’s your principal residence and at least 20 per cent if the property is considered an investment.
Borrowers often think that if they are not first time home buyers, they need to have a larger down payment of 20 percent or more. It may be comforting to know that as long as the property is going to be your principal residence, the minimum down payment required is still only 5 percent of the purchase price regardless of how many homes you’ve purchased in the past or currently own.
You may also be confused about the differences between a deposit with your offer, the down payment, mortgage default insurance and closing costs so let’s break it down.
As a purchaser, you have to put forward a deposit with your offer to purchase. The deposit depends on the purchase price and how much you feel comfortable putting forward that also satisfies the seller.
The deposit makes up part of your total down payment and will be credited against the purchase price at the time of closing. Your real estate lawyer receives a document called a “Statement of Adjustments” which is prepared by the seller’s lawyer and reflects the purchase price you agreed to pay less the deposit you put forward plus or minus any pro-rated adjustments for property taxes and common element fees if the property is a condominium.
Once the amounts are adjusted and tallied, your lawyer can calculate the rest of the funds you will have to bring in, which comprises the rest of your down payment, plus land transfer tax and legal fees.
Mortgage Default Insurance
If you have less than a 20 percent down payment, you have to pay mortgage default insurance, otherwise known as high ratio mortgage insurance.
By law, your mortgage lender must have your mortgage application approved and insured through one of the three high-ratio mortgage insurance companies in Canada, which are Canada Mortgage and Housing Corporation, Genworth Financial and Canada Guaranty.
Once your mortgage is approved, you pay an insurance premium, which is added to your original loan amount and amortized out over twenty-five years or the term you choose, which cannot exceed twenty-five years.
As an example, let’s use a $500,000 purchase price with a 5 percent down payment.
Purchase Price: 500,000
Down Payment Required: $25,000
Deposit with Offer: $5,000
High Ratio Mortgage Premium: $19,000
Remaining Down Payment: $20,000
Required Total Mortgage Amount (including insurance premium): $494,000
Therefore, mortgage default insurance is not part of your down payment. You can choose to pay high ratio mortgage insurance ahead of time, but it is not mandatory to do so.
Closing costs do not form part of your down payment, either. These costs include but are not limited to land transfer tax and lawyer fees and usually add up to approximately 1.5 percent of the purchase price. For example, if you were purchasing a $500,000 home, your closing costs would be approximately $7,500 in addition to your $25,000 down payment.
Land Transfer Tax
As mentioned before, Land Transfer Tax is not included in your down payment but does make up the total closing costs you are required to pay in order to complete your purchase successfully.
Your lawyer determines how much land transfer tax is payable (you can also get your mortgage broker to calculate it for you) and added to the final amount due on closing as specified in the Statement of Adjustments. If you are a first time home buyer, you are eligible for a rebate of up to $4,000 of the Land Transfer Tax owing.
If you want to buy a home, the amount of information, as well as the process itself, can be overwhelming and confusing. We specialize in working with first time home buyers to ensure they understand what they have to save for a down payment and how that affects their monthly payments.
If you’re looking for a home loan and have questions about the amount of your down payment, please do not hesitate to get in touch with us.
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Sarah A. Colucci, Sr. Mortgage Agent/Mortgage Edge, Broker 10680
Direct: (647) 773-4849/ Email: firstname.lastname@example.org