How much of a down payment do I have to put down to buy a new home? The short answer is anywhere from 5% and up.
Effective February 15, 2016, the minimum requirements for new mortgages has changed and as of this date, there’s a three tiered structure;
- On a purchase price of $500,000 or less, the minimum is 5% down
- On a purchase price of $500,000 to $1 million, the minimum is 5% of the first $500,000 and 10% on the remaining balance. For example, if you are purchasing a home priced at $700,000, you would pay a minimum of 5% of the first $500,000 ($25,000) plus 10% of the remaining $200,000 ($20,000), for a total down payment of $45,000
- On a purchase price of $1 million or more, a down payment must not be less than 20% of the purchase price
First time home buyers
First time home buyers often have less than 20% for a down payment. To help with down payments, first time buyers can withdraw up to $25,000 from an RRSP as long as the funds have been invested in the RRSP for longer than 90 days. The funds withdrawn must also be repaid over a 15 year period with a one year grace period.
The withdrawal is not considered taxable income unless the repayments are not made, in which case, you must add 1/15th of the amount withdrawn to your income when you file your income tax for a particular year. For instance, if you withdraw the full $25,000 you’ll be required to repay $1,666.66 each year for 15 years. If you don’t make a repayment in a given year, then $1,666.66 has to be added to your income for that year and is subject to the income tax laws of the Canada Revenue Agency.
Type of mortgage
The type of mortgage you obtain will depend on the amount of your down payment. There are two types of mortgages. These include a Conventional Mortgage, which is when you pay a down payment of 20% or more, and a High Ratio Mortgage, which is when the down payment is less than 20% of the purchase price.
With a High Ratio Mortgage, it must be insured against default by CMHC, Genworth Financial Canada, or Canada Guaranty. The insurance premium can either be paid at the time of purchase, or it can be added to the principal mortgage amount. The premium will depend on the mortgage amount and the percentage of the down payment but generally ranges between 0.5% to 2.75% of the mortgage amount.
It’s best to put as much money down as you possibly can. This will lower the amount of the mortgage you need, which in turn will lower the amount of interest you pay over the life of the loan. It may also eliminate the need for the extra mortgage insurance if you can get above the 20% threshold for the down payment amount.
If you are considering buying a home, call Scott Parker at RE/MAX of Nanaimo to get your home search started. Scott can put you in touch with a mortgage professional about your situation.