How Much Do I Need for a Down Payment?
February 2, 2016 | Posted by: Laurie Anne Faulkner
What is a Down Payment?
A down payment is the money you put forward toward the price of a home – your cash outlay - this amount needs to be a minimum of 5% of the purchase price for a home up to $500,000 and an additional 10% of any purchase price over $500,000. Your deposit will form part of these funds.
Closing costs are in addition to your down payment.
Lenders and insurers require that your down payment be derived from non-borrowed resources. You can verify this in many ways, including:
Savings : A lender will need to see a 3-month history (in the form of bank statements) of your bank account to verify the savings you have available for a down payment. The reason for the history is to show that the money was indeed saved.
Gift: It is acceptable to have a down payment given to you. The gift must be from a direct relative and accompanied by a letter stating that the money does not have to be paid back. A statement from your bank account showing the deposit of the gift into your own account is also required. The statement must include your name, account and transit number as well.
Equity from the Sale of your Property: If you are using the funds from the sale of a currently owned property that you will or have sold, the lender will want to see either a copy of a firm contract of purchase and sale on that property, or if the home has already been sold, a statement of adjustment from the sale provided by your lawyer at closing and a current bank statement showing funds on deposit.
Investments (non-registered): Stocks, bonds, GICs, and other investments can also be used for your down payment. A 90 day statement showing your name and account number will also be needed for verification.
RRSP: If you haven’t owned a house in the past five years you may also use your RRSPs for your down payment – tax-free. The limit is $25,000 in RRSP assets per person. Aft the start of your 2nd year in the home you will; start to pay this back in equal payments over 15 years. Check with your financial advisor about further stipulations and to see whether this works with your financial plan.
What Should My Down payment Be?
To Purchase a home depending on ones qualifications and situation a minimum of 5% for down payment depending on the purchase price plus closing costs (on average we say 1.5% to 2%) of the purchase price may be acceptable or as much as 35% down plus closing costs for other situations.
A Pre-Approval will help determine exactly what your individual situation will be.
For many people, saving for a down payment is the hardest part of buying a home. At one time, you needed a down payment of 25% of the price of your home. Nowadays, as discussed above, you can buy a home with as little as 5% down if the purchase price is under $500,000.
Should you? Reasons for: Reasons against:
Wait and build up a large down payment?
• You will pay less interest.
• You can avoid paying for mortgage insurance.
• You reduce the risk of not being able to pay back the loan if the value of your home drops and you have to sell.
• You have to wait to own a home and you will pay more rent.You could have put that rent towards paying a mortgage, and owning more of your home faster.
• You have to be disciplined or you could spend your savings on other things.
• In some areas, house prices may rise faster than you can save the down payment.
Buy earlier with some other type of loan?
• You can stop paying rent sooner and get into a home faster.
• You have the chance to own more of your home sooner.
• You don’t risk house prices rising more than you can afford.
• You will pay more interest.
• You will have more worries if you take on more debt than you can handle.
• If you have to sell and the value of your home drops, you may not be able to pay back the loan.
Tip: It costs less to borrow if your down payment is at least 20%. If you put less down, you will have what is called a “high-ratio mortgage.” This means you will have to buy insurance from the Canada Housing and Mortgage Corporation (CMHC), at an additional cost to you.