Down Payments

A down payment is required whenever a real estate purchase is made. If you are looking to purchase a new home you may be wondering how large of a down payment you need and where that down payment can come from.

While there is no “rule” that outlines the perfect down payment, there are some standards in place that are requirements for seeking a mortgage. In addition, you may encounter varying levels of fees or interest rates based on the size of down payment placed towards the mortgage.

Down Payment Requirements

The minimum down payment for a typical mortgage in Canada is 5%. This means that if you are trying to purchase a property with a sale price of $100,000, you will be required to place a minimum of a $5,000 down payment.

Of course, it is generally advised to place as large as a down payment as you can reasonably afford. There are numerous advantages to placing a larger down payment, such as lower insurance fees and potentially lower interest rates.

Common Sources of Down Payments

Most people place a down payment after saving money from their paycheques. However, there are other sources for a down payment that you can use aside from what you earn from your employment.

These include:

  • Gifts from family or friends – It is common for family members to gift a portion of the down payment used in new home purchases.
  • Home equity lines of credit – If you are purchasing a second property (or third, or fourth, and so on), most lenders will allow you to use a line of credit secured against the equity of your existing home as a source of the down payment.
  • Bonuses or other financial windfalls – A bonus from work, winning the lottery, or other financial windfalls are also acceptable sources of your down payment.

When raising a down payment remember to include as extensive paper trail. This will make it easy to verify the source of your down payment, making the approval process easier and faster.

Common Security Measures Enforced by Lenders

You can expect your lender to want to verify the origin of your down payment. If your down payment has not been in a single account for a period of 90 days or more, the lender will ask you for verification on the down payment source. This can be as simple as providing bank statements that show where various deposits were made, where they come from, and when they were completed.

This is done primarily to help safeguard against fraud and money laundering. It is also done to ensure that you are not utilizing high-risk, high-interest credit, such as a credit card, to use as a down payment.

Notable Advantages of Using a Larger Down Payment

A larger down payment offers you several advantages compared to a smaller one. These include:

  • Lower CMHC Fees – CMHC fees are paid by the borrower (you) and are a percentage of the total value of the mortgage in relation to the size of your down payment.
  • Higher initial equity in the property – This acts as a layer of security in the event of market pricing fluctuations. If you put 20% down on a $100,000 mortgage, for example, you will start off owing $80,000. If the price of your home changes and loses 10% of its value, you will still owe less at $80,000 than the new market value of the home, $90,000, preventing you from being underwater (owing more than the property is worth).
  • Lower mortgage premium – a $100,000 home with 5% down, amortized over 25 years at 3%, returns a $450 monthly mortgage premium. With 20% down that same mortgage is $379 per month.
  • Potentially, lower interest rates – Depending on your credit score, a lender may offer higher interest rates with a smaller down payment percentage.

CMHC Fees In Relation to Your Down Payment

Many mortgages are insured by insurance corporations, such as the Canada Mortgage and Housing Corporation (CMHC). This mortgage insurance provides a layer of assurance to your lender, insuring them for high-ratio mortgages (mortgages with fewer than 20% down) and providing a layer of security in the event of delinquency.

CMHC fees are paid by the borrower and are a percentage of the total amount borrowed in relation to the down payment made. The fees are typically added to the mortgage.

CMHC fees vary based on the down payment percentage and may change over time. As of May 2015, CMHC fees are:

  • 3.15% of mortgage value with under 10% down.
  • 2.4% of mortgage value with over 10% but under 15% down.
  • 1.8% of mortgage value with over 15% but under 20% down.
  • 1.25% of mortgage value with over 20% but under 25% down
  • 0.75% of mortgage value with over 25% but under 35% down.
  • 0.6% of mortgage value with over 35% down.

Most lenders will not require CMHC insurance when the down payment is 20% or greater.

Determining Which Down Payment Size Makes Sense for You

While it is generally advised to place a large a down payment as you can afford, this isn’t always the case. Work with your mortgage broker to determine which size of down payment is the most appropriate when taking your lifestyle and short-term financial goals and obligations into consideration.

Need advice? Give us a call: we’re here to help you make sense of what is sure to be one of the most significant financial transactions in your life!