How Much Do I Need to Buy a Home?
Minimum down payment
You’ll have to put some money “down” on the home you’re wanting to buy. Just how much depends on a few things:
- price of the home
- your credit health
- if you’re self-employed
Any monies you put down on your home are deducted from the purchase price, thus a bigger down payment can help you quality for a mortgage on a more expensive home.
Here’s what the Government of Canada web pages have to say about it:
Table 1: The minimum amount you'll need for your down payment as based on the purchase price of your home
The minimum downpayment on a home that’s $500,000 or less:
5% of the purchase price on a home that is $500,000 or less
If the purchase price of the home is $500,000 to $999,999
5% of the first $500,000 of the purchase price
PLUS 10% for the portion of the purchase price above $500,000
If the value of the home is $1 million or more, you’ll need to put down 20% of the purchase price
Can I Borrow the Money for my Downpayment?
Well, you won’t be able to include it as a part of your mortgage. Whether you borrow money from other sources is up to you, but make sure you can pay it back! Owning your own home can be wonderful, but owning a home you can’t afford probably won’t bring you a lot of happiness or security.
The government offers incentives from time to time, and your financial professional will know them inside out! The HBP (Home Buyer’s Plan) is listed below, and there are others. Talk to a professional. Take the time.
Some more examples from the Government Site: How to calculate your minimum down payment
Purchase price of your home is $500,000 or less
If the purchase price of your home is $400,000. You’ll need a minimum down payment of 5% of the purchase price.
The purchase price multiplied by 5% totals $20,000.
Purchase price of your home is more than $500,000
If the purchase price is $600,000, your minimum down payment will be 5% on the first $500,000 = $25,000.
On the remaining $100,000, your minimum down payment will be 10% = $10,000.
Add both totals together and your minimum down payment will be $35,000.
Home Buyers’ Plan (HBP)
You may be eligible to withdraw up to 25,000 tax-free from your RRSPs for buy or build a home. This is what they call the Home Buyers’ Plan (HBP). The government gives you up to 15 years to repay the money you took out of your RRSPs, which might be a great option for you.
Of course, there are rules:
- You must be a 1st time home buyer
- The home has to be for you
- You must plan to live there for at least the first year
Know what? Here’s the link below. Check it out for yourself as part of an education. Make sure to include your financial professional in the conversation when it’s time to sort out your details!
A couple things to consider:
- the money you’re taking out for a downpayment won’t be earning interest anymore
(perhaps the investment in the home counters that to your satisfaction)
- Not replenishing your RRSPs on time could cost you a bundle in taxes
Mortgage loan insurance
This topic is mentioned in another part of the website, as well. Mortgage Loan Insurance is for the LENDER, however, you’re the one who must pay for it. In the event that you’re unable to make your mortgage payments, the LENDER is covered. You’ll also hear it referred to as “Mortgage Default Insurance”.
Please don’t think of it as a bad thing. Without this insurance, lenders wouldn’t be as willing to lend you the money you need for the home of your dreams.
If your down payment is less than 20% of the price of your home, you’ll need to purchase mortgage loan insurance.
If you’re self-employed or have a poor credit history, you might also be required to pay for mortgage loan insurance, even if you’ve put down a 20% down payment.
You cannot always get Mortgage loan insurance; that is to say, it’s not available to you in some circumstances, such as:
- a home that’s worth $1 million or more
- the loan doesn’t meet the mortgage insurance company’s standards, (this could involve a lot of elements)
Just talk to your financial pro! They’ll be able to set this up for you with your financial provider.
Cost of mortgage loan insurance
The premiums aren’t necessarily cheap. Mortgage loan insurance ranges from 0.6% to 4.50% of the amount of your mortgage, and the premium is going to depend on the amount of money you’ve been able to put down, how your credit is doing, and a number of other factors that help lenders determine the amount of risk they’re taking by granting a loan to you. The bigger your down payment, the less you’ll pay in mortgage loan insurance premiums.
Find premiums based on the amount of your mortgage loan:
Paying Your Premiums for the Insurance
You’re able to add your premiums to your mortgage if you like, or you can pay your premium up front. If you’re adding your premium to your mortgage, you’ll pay interest on the amount at the same rate as you’re paying for your mortgage.
You’ll need your financial adviser to tell you if provincial sales tax applies to your premiums. Generally, the taxes have to be paid in advance.
Example: How mortgage loan insurance premiums are calculated
The home you want to purchase is $400,000 and you have a down payment of $56,000… (14% of the purchase price).
Your downpayment is LESS than 20% of the value of the home, so you’re going to need mortgage loan insurance.
The lender determines that your premium will be 3.1%, based upon the downpayment you’ve provided.
To calculate your mortgage loan insurance premium:
Take the price of your home ($400,000) and subtract your down payment ($56,000) = $344,000
The amount of your mortgage is $344,000 multiplied by the 3.1% insurance premium = $10,664
Your mortgage loan insurance premium will be $10,664
Recall that you can pay this premium all at once, or you can add it your loan ($344,000 + $10,664 = $354,664). The amount of your mortgage is now $354,664 so you’ll be paying more interest for the higher loan.
How’s it All Add Up?
If you have a 25 year mortgage with a 4% fixed interest rate, you’re going to be paying an extra $20,038 interest on your mortgage loan insurance premium over the life of your mortgage than someone who’d been able to come up with a 20% down payment. You were $24,000 short. In total, you’ll pay $30,702 for your mortgage loan insurance.