Down Payment Requirements
The Basics of Down Payments
A down payment is one of the key aspects of obtaining a mortgage. It’s the upfront portion of a property’s purchase price paid out of pocket. This initial payment is your first equity stake in your home, and its size can significantly impact the terms of your mortgage. With this article we aim to guide you through this process, helping you understand how your down payment affects your loan-to-value ratio, interest rates, and monthly payments.
Minimum Down Payment Requirements in Ontario
In Ontario, and Canada in general, the minimum down payment depends on the property’s purchase price. For homes costing up to $500,000, the minimum down payment is 5%. This means that for a home priced at $300,000, you would need to save $15,000 for the down payment. For homes priced between $500,000 and $999,999, it’s 5% for the first $500,000 and 10% for the remaining amount. For example, for a home priced at $700,000, you would need a down payment of $45,000: 5% of $500,000 ($25,000) plus 10% of the remaining $200,000 ($20,000). For homes priced at $1 million or more, the minimum down payment is 20%.
Acceptable Down Payment Sources
When planning for a mortgage, it’s important to understand the various sources that can contribute to your down payment. Here are some acceptable sources:
Personal savings is one of the most common sources for a down payment. This includes funds held in bank and/or investment accounts such as savings, chequing, or Tax-Free Savings Accounts (TFSA). It’s important to note that these funds must be traceable, meaning large amounts of unaccounted cash are usually not accepted due to the risk of fraud or money laundering.
Registered Retirement Savings Plan (RRSP)
Many first-time homebuyers in Canada take advantage of the Home Buyers’ Plan (HBP), which allows them to borrow up to $35,000 from their Registered Retirement Savings Plan (RRSP), tax-free, as long as the money is repaid within 15 years. This can be a significant source of funds for down payment, especially if you’ve been contributing to your RRSP for several years.
Gifted Money by Immediate Family
Gifts from immediate family members are another acceptable source of funds for a down payment. This can be particularly helpful for first-time homebuyers who may not have had enough time to save for a large down payment. However, it’s important to note that the gift must be truly a gift, not a loan, and this will need to be confirmed in writing.
Borrowed Down Payment
In some cases, you may be able to borrow the funds for your down payment. However, this increases your debt load and may affect your mortgage qualification. Therefore, it’s important to discuss this option with your mortgage professional to understand the implications.
There are other sources that can contribute to your down payment. These include proceeds from the sale of another property, funds from an inheritance, and settlement from a marital separation. It’s important to discuss these options with your mortgage professional to ensure they are acceptable sources of funds.
How TheBroker.ca Ltd. Can Help
TheBroker.ca Ltd. provides guidance on navigating these requirements. We can help you understand how much you need to save for your down payment and how it affects your mortgage payments. We can also assist you in exploring various financing options, that are specific to your situation.
Factors Affecting Down Payment Requirements
Several factors can affect the minimum down payment required. These include the purchase price, property’s location, the borrower’s credit history, and other factors. For instance a higher credit score might give you more leeway in terms of your down payment, as lenders may be more willing to offer favourable terms to borrowers with strong credit.
The Role of Mortgage Loan Insurance
Mortgage loan insurance, also known as mortgage default insurance, protects the lender in case the borrower fails to make their mortgage payments. It’s typically required for mortgages where the down payment is less than 20% of the purchase price. This insurance can be a significant cost, but it allows buyers to enter the market sooner with a smaller down payment. It’s important to point out that as a result of the mortgage being insured, the lenders will generally offer lower interest rate, compared to mortgages that are not insured. At TheBroker.ca Ltd. we can help you understand the costs and benefits of mortgage loan insurance and how it fits into your overall home buying strategy.
Understanding Closing Costs
Closing costs are additional expenses incurred during the property transaction that are not included in the mortgage or down payment. These costs are essential to consider when planning for your home purchase. If you are not prepared for them, they can add up and greatly burden your financing.
In Ontario, lenders typically expect borrowers to have funds available to cover closing costs of at least 1.5% of the property’s purchase price. This means that if you’re purchasing a property for $700,000, lenders would generally want to see that you have at least $10,500 set aside to cover these costs. These costs can include various fees such as land or property transfer taxes, legal fees, and inspection fees. It’s always recommended to consult with a mortgage professional to understand the specifics of your situation. Please note that actual closing costs may vary.
Understanding the minimum down payment requirements and closing costs is very important when planning to buy a home. TheBroker.ca Ltd. can provide valuable guidance to help you navigate these requirements and make informed decisions. Whether you’re a first-time homebuyer or looking to invest in real estate, understanding your down payment options and closing costs can help you make the most of your mortgage.