The down payment you have available to invest when getting a mortgage will play an important role in the defining of the terms that follow. This particularly applies to the amount that you will have to borrow and pay back in monthly installments.
A down payment is a payment that comes from your own pocket, not from your mortgage lender, to initiate the process of obtaining a mortgage. This amount can be as little as 5% of the amount that you intend to borrow or it can be in excess of 20%. The more that you pay upfront as a down payment, the less you will have to borrow from a bank or other lenders. This means less interest and lower monthly payments.
Not all mortgage down payment options are available to everybody and here’s an overview of the 2 common options mortgage brokers offer home buyers:
- Conventional mortgages
- Insured, low down payment mortgages
- Borrow down payment (2nd mortgage, line of credit, family, etc,)
In a conventional mortgage, like one obtained from a bank, a 20% minimum down payment is often necessary. This foregoes the necessity of insuring the mortgage against default, particularly because banks and other lenders typically cannot lend a mortgage that exceeds 80% of the total cost of the house without insurance from CHMC or GENWORTH.
Low Down Payment & Insured Mortgages
When you have less than 20% of the overall cost of the house available as a down payment (many first time home buyers do), it will be necessary to purchase mortgage default insurance. A down payment on an offer like this could be as low as 5% of the total cost, but the insurance premium adds heavily to the carrying costs of the property. A mortgage premium is paid one time at the end of closing procedure. Many lenders offer this option as an alternative to conventional mortgages.
To be clear, mortgage default insurance does not protect the borrower, but the lender, in the event that the buyer defaults on their mortgage.
Using Your RRSP as Down Payment
Under the federal Home Buyer’s Plan, citizens are able to qualify for up to $25,000 per person ($50,000 per couple) in RRSP savings that can go toward the down payment on a home. There are, however, some requirements and information that you should know about paying your down payment this way:
- The money in your RRSP must have been there for at least 90 days.
- The withdrawal of this money is not taxable as long as it’s paid within 15 years.
- The contribution of your RRSP is tax deductible.
If you have an accountant or other financial planner, it is advisable to seek their guidance before deciding to use the funds in your RRSP savings to put a down payment on a new house.
Paying a Higher Down Payment
The thought of paying more than 20% for a down payment probably makes you cringe; that’s a lot of money! But tackling your down payment this way, if you can, comes with heaps of benefits, particularly a lower mortgage that has to be taken out. A lower mortgage means smaller monthly payments, reduced interest rates, and paying off your mortgage that much faster!
Regardless of how much you are issuing as your down payment, you will want to make sure to have some extra funds to cover additional costs. These costs include the cost of closing procedures, home inspection costs, repairs and moving expenses.