How Much Should Your Down Payment Be?

Conventional real estate wisdom states that homebuyers should have at least 20 per cent of their down payment when buying a house, but with prices in places like Toronto soaring right now, it likely makes more sense to get into the market as soon as possible.

The minimum down payment under Canadian law is only five per cent, but if your down payment is anything below the 20 per cent mark it’s considered a high-ratio mortgage.

Carrie Davidson

"It's a sticky situation,"

writes Carrie Davidson, AMP with Dominion Lending Centres.

"Many clients as first time homebuyers can only afford insured mortgages to get their foot into the Toronto housing market, unless they have really high income/savings, or a gift/inheritance from [a] family situation."

Mortgage Default Insurance

A high-ratio mortgage means you’re going to have to shell out more money for a third party like the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada or Canada Guaranty to insure the loan in case you default on your payments.

The cost of the insurance premium will depend on the amount you’re borrowing and the percentage of your down payment. According to CIBC, mortgage default insurance premiums range between 0.5 and 2.75 per cent of your total mortgage amount. They can be added to the principal balance and paid off as part of your mortgage, or you can pay it off as a lump sum at the time of purchase. The later can be subject to provincial sales taxes.

Shiny Builidings by Benson Kua

Now this isn’t much of a problem for people already in the housing market according to Davidson.

"Repeat buyers often do have a minimum 20 per cent down payment as the values of Toronto homes have increased so much over the past five-plus years and therefore their current home has increased in value substantially when they do sell it."

It also isn’t so bad if you live in a relatively slow housing market. It’s probably worth your while to save up the 20 per cent, since home prices aren’t likely to rise exponentially in the few years it would take you. According to Canada Mortgage Housing Corp, a down payment of 10 per cent on an average priced home ($433,367 as of August) would mean a premium of $9,361 and monthly payments of $1,807 on a five-year fixed mortgage at 2.59 per cent.

Like every other aspect of Canadian real estate though, this is a tale of two markets. The average price of a home is rising five per cent annually, but that’s less than the increases seen in places like Toronto and Vancouver. Waiting those extra couple years could price you out of the market, or it could mean you actually end up paying more each month. Speaking with an accredited mortgage consultant is the best first step you can take if you’re looking to save money.

Getting to 20 Per Cent

If you’re dead set on raising 20 per cent, there are a number of ways to raise the extra cash:

• Sell other assets like cars or boats to raise capital

• Cash in stocks or bonds

• Use the RRSP Home Buyers Plan

• Cut expenses

• Get a second job

Those are just some methods you can use to get some extra cash. As far as saving goes, first you need to figure out what 20 per cent of the down payment would be. If you don’t have a calculator you should take the amount you can afford to spend on a house, divide it by 100 and multiple that by 20.

Cost of house: $300,000  
Divided by 100: $3,000
Times 20: $60,000

Now, if you want to have that money saved in five years, divide that number by 60, which is the number of months in five years. You’ll get $1,000 and that is how much you’ll have to put away each month. If it’s too much you can save for longer, buy a less expensive home, or pay to get mortgage default insurance.

Cabbagetown by Jay Woodworth

Get Your Foot in the Door

A study this year by the Canadian Association of Accredited Mortgage Professionals shows that 18 per cent of first-time buyers received gifts or loans towards their down payment. Without that help though, it can be very difficult to get into the bigger markets like Toronto or Vancouver. Davidson says in the long run it makes sense to get in as soon as you can.

"Without gifts from family, most first time buyers decide to insure their mortgage and pay the premium [...] Getting their foot in the door to homeownership is worth it!"

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