The down payment that a home buyer puts on a home can have a significant impact on that home's affordability over the long term. The right down payment can save the homeowner money on monthly mortgage payments while also reducing the loan amount need to make the purchase.
Canada's Minimum Down Payment Rule
Potential homeowners in Canada must be able to make a minimum down payment that is a percentage of the total purchase price. That percentage is tied to the purchase price of the home with it rising as the price rises.
- A home priced below $500,000 requires a minimum down payment of five percent.
- Homes that have a purchase price of between $500,000 and $999,999 require a down payment of 10 percent at the minimum.
- A home that is valued at $1 million and above must be accompanied by a down payment of at least 20 percent.
CMHC 20 Percent Rule
The Canada Mortgage and Housing Corporation (CMHC) has enacted a 20 percent rule. This states that a home buyer that has a mortgage that is tied to a down payment of less than 20 percent must insure that mortgage with CMHC. These insured mortgages come with premiums that are a percentage of the home's price.
That percentage, though, is driven by the amount that was used as a down payment. A typical premium is between 1.80 percent and 3.60 percent. This can add thousands of dollars to the cost of a home purchase over the course of the mortgage.
An important note that potential home buyers need to be aware of is that homes that are valued over $1 million require a down payment of 20 percent. Therefore, they do not qualify for insurance from CMHC.
Down Payment Considerations
When determining the right amount to make as a down payment, a potential homeowner needs to consider several questions. While a down payment of 20 percent removes the CMHC insurance requirement, there are other costs associated with purchasing a home that must be considered.
A home buyer might choose to make a minimum down payment and purchase insurance from CMHC. This cost could be balanced by options like a lower mortgage rate, strong appreciation value or by renting a portion of the house to offset the monthly responsibility.
Paying LMI When You Cannot Make a Full 20 Percent Down Payment
If an individual does have the opportunity to purchase a home but does not have a 20% down payment, he or she will need to purchase Lender’s Mortgage Insurance (LMI). LMI allows many qualified buyers to purchase their Canadian dream homes without needing that large amount up front, while still protecting the lender.
LMI protects the lender in case the borrower defaults on the loan--much in the same way the down payment normally would provide collateral in case of default. The LMI premium will vary depending on the cost of the home, amount of down payment and type of mortgage. In most cases, the LMI premium is included as part of the monthly mortgage.
Using a RRSP to Purchase a Home
Potential homeowners who also have a registered retirement savings plan (RRSP) have the option of withdrawing up to $25,000 from it and using it to help them purchase a home. This withdrawal must occur during a single calendar year. While the payment of taxes or interest on the money that is withdrawn is not required, it does need to be repaid within 15 years.
Purchasing a home is a huge financial undertaking. Whether you're buying in Calgary's City Centre or in the surrounding region, this always rings true. Knowing the particulars of down payments when buying a house in Canada can help potential home buyers make smart decisions about the use of their money.