Down Payment & CMHC Insurance

Down Payment & CMHC Insurance

As you are contemplating buying home, you cannot forget your down payment. What is the minimum down payment required for a mortgage? How can I save enough money for this down payment? What are the advantages of a large down payment? You will find answers to all these questions and more on this page, which is the best and most informative guide to down payments in Canada.

What is a Mortgage Down Payment?

Your mortgage down payment is a lump sum that you pay toward the purchase of your residence when you sign for your loan. Because you pay it at your loan’s closing, your final mortgage principal is determined by subtracting the down payment amount from your home purchase price and then adding the different fees for things such as mortgage insurance. Your down payment is typically expressed as a percentage of the purchase price. So, if you want to know how much you are putting down on a home, take what you have saved for the down payment and divide it by the home’s purchase price.

Mortgage Down Payment Requirements

Historically, lenders have looked for a 20 percent down payment from borrowers to qualify them for a loan. During the last century, however, the Canadian government introduced mortgage insurance to help people with less than a 20 percent down payment purchase a home. Mortgage insurance, obtained most commonly through the Canada Mortgage and Housing Corporation (CMHC), covers the lender’s losses in the event that a borrower defaults on a loan, and statistics prove that those who put less than 20 percent down are more likely to default on their loan than those who put 20 percent or more down on their home purchase.

More than half of all mortgages in Canada have been insured through the CMHC and other entities, so most borrowers pay a down payment that is under 20 percent of their home’s purchase price. In recent years, the average down payment in Canada has been 7 percent, which is just two points higher than the minimum requirement of 5 percent. Mortgage insurance is unavailable on mortgages where the down payment is less than 5 percent of the home’s purchase price, which makes it highly unlikely that those who can put less than 5 percent down will qualify for a loan. In rare cases, it may be possible for such people to find a lender, but the tightening of mortgage rules and the global recession that began in 2008 are dramatically reducing the number of potential lenders for those with a down payment of less than 5 percent. In any case, if such a lender is found, extra fees and charges will almost certainly apply.

How Does Your Down Payment for a Mortgage Affect Your Loan?

Although mortgage insurance has benefited many people who want to get into a home sooner rather than later, there are still many reasons to save the highest down payment possible. Of course, in an ideal world, you will put 20 percent down because that will eliminate your need for mortgage insurance and thereby lower the overall cost of your home. Nevertheless, you should try and put as much down as you can even if you cannot bring a 20 percent down payment to closing. Here are some reasons why:

• The more you put down, the lower your loan principal will be. Since interest is calculated based on your loan principal, the more you put down on your home, the less you will pay in total interest over the life of your loan.
• The more you can put down on your home, the lower your monthly payment will be. In other words, as you reduce the amount of your original loan principal through a higher down payment, you also reduce what the bank will require from you each month as a loan payment.
• The greater your down payment, the less you will pay in mortgage insurance. The percentage used to calculate your mortgage insurance premium depends on how much you are able to put down on a home. For instance, you pay a higher insurance premium if your down payment is 5–10 percent of your home purchase price than you do if your down payment is 15–20 percent. See our mortgage insurance guide for more details.
• The greater your down payment, the easier it will be to shorten your amortization period while maintaining the affordability of your monthly loan payments. In turn, you will pay less for your home over time because the shorter the loan, the faster you pay down the principal and interest.

Down Payment Sources

Now that you have a better understanding of how down payments are defined and how they affect a home purchase, you should understand different down payment sources and how they affect your mortgage insurance. Here are some guidelines:

Traditional Sources of a down payment do not lead to any extra fees beyond the basic mortgage insurance premiums for the buyer. Such traditional sources include:

• personal savings
• sale of stocks, bonds, or property
• gifts from immediate relatives
• withdrawal loan of up to $25,000 from your Registered Retirement Savings Plan (RRSP) (To qualify for this withdrawal, you must intend to use the home as your primary residence, buy your home by October 1 in the year following the withdrawal, have no outstanding balance on your previous RRSP withdrawal, sign a home contract, withdraw funds within thirty days of possessing the home’s title, and you must not have owned a home within the past four years.)

Non-Traditional Sources for a down payment can also be used for a home purchase, but your insurance premiums will be 0.15 percent higher than if you use traditional sources. Non-traditional sources include such things as:

• funds that you borrow
• gifts from friends or other non-immediate family members

Saving for a Down Payment?

We hope you have found this guide helpful for answering this question: What is a Down Payment? We will now conclude with this list of proven tips on how to save the most money for a down payment on your next home:

• Open a savings account that is specifically intended for your down payment and use it only for that purpose.
• Choose a savings account for your down payment that pays you the highest interest rate.
• Create and live by a budget that enables you save the most money possible.
• Instead of spending your next raise at work, have part or all of it automatically deposited into your down payment savings account.
• Buy Canada Savings Bonds or low-cost, proven mutual funds
• Amass as much money as possible in your RRSP so that you can make a withdrawal of up to $25,000 for a down payment.

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