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If you are looking to purchase a house from a bank, you will need to know how much down payment for house or loan you will need and will to have these three things: a credit score that meets the requirements of your bank, a history of a stable income that will give you the resources you need to pay the loan each month, and a down payment.
What is a down payment? That’s the amount of money you pay up front to complete the purchase of a home. The bank pays the rest of the purchase price to the seller, and then you owe the bank that difference — in addition to interest. For what is known as a “conventional” loan, you need a minimum of 20 percent of the purchase price. So for a $500,000 home, you would need to have $100,000 ready to put down in order to get a conventional mortgage, and you would be financing $400,000.
What Is The Minimum Down Payment Required For A Mortgage?
The bank would lend you the $400,000, and you would start making monthly mortgage payments that are a combination of the interest and principal. Early on in the loan, most of your payment goes to interest, and then later most of it goes to principal, so it takes a while to start building up equity. For a 30-year amortization (payment) period, you would pay $1,909.66 each month for 360 months (12 x 30 years) for a total of $687,478.03. That is a lot more than the $400,000 — but that’s the cost of borrowing that much money over time. This example assumes that you can keep that 4 percent rate over the full amortization period. In Canada, you can’t sign a loan for a term longer than 10 years, and so when you renew the loan, the rate may be higher or lower, depending on market conditions.
Minimum Mortgage Down Payment
But what if you don’t have 20 percent to put down? Banks will approve loans with as little as 5 percent down in Canada, but these “high ratio” mortgages will cost you more. First, you’re financing more of the purchase price, so your interest costs will go up. Also, you have to pay for mortgage insurance with this type of mortgage. Third party companies like Canada Guaranty, the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada offer this insurance, and it costs you between 0.5 percent and 2.75 percent of the mortgage amount. The less you put down, the higher that percentage will be.
So, just for comparison, let’s say you buy that $500,000 house with a 5 percent down payment of $25,000. You’re now financing $475,000. We’ll keep that 4 percent interest rate but add in that 2.75 percent mortgage insurance premium. Now you’re paying $2,267.72 each month, so about $350 more. Over 360 payments, you’ll now pay a total of $816,380.16 over 30 years. So not having that $75,000 to put down cost you almost $130,000 down the road in higher payments because of the mortgage insurance and the fact that you were putting less down to create a smaller principal.
If you don’t have enough for a down payment of your own, you’re not alone. Amansad Financial has helped other clients who lack the amount needed for a down payment to get into the home they wanted anyway. One of these involves seller take back financing. In this case, the seller would make a loan to you so that you have a down payment large enough to satisfy the bank. You would have two monthly payments each month until you had paid off the seller’s note. In markets that are a little soft, homeowners are often quite willing to work with this type of arrangement, particularly if they have a lot of equity in the home at sale or are downsizing with their next move. That way you can get a mortgage from a bank that does not require a mortgage insurance premium, saving you a lot of money over time, and the seller makes a little more money, although it takes longer for that money to come in.
If you have enough money to put down 25, 30 or even 40 percent down but you do not have the credit to qualify for a bank loan, you can leverage that into a private mortgage. These are short term loans that allow you to get into the house and give you a two- or three-year term so that you can get your financial ducks in a row to qualify through a bank or other traditional lender.
If you need help with your down payment, talk to one of our mortgage specialists at Amansad Financial today. We have helped clients in a variety of financial situations, and we can make an individualized set of recommendations for your case.
Are You Struggling to Come Up with a Down Payment?
One of the biggest obstacles that many people face when purchasing a home is coming up with a down payment. It can be hard to set aside a five- (or in some cases six-) figure amount to pay before you move out of your rental property and into the home you’re buying. Even in cases where a bank is willing to approve a high-ratio loan, in which the down payment is less than 20 percent, coming up with that pile of money can be difficult. Fortunately, for those having a hard time coming up with down payment funds, Amansad Financial has some suggestions.
Ways to come up with Down Payment for a Mortgage
One common solution that people come up with is what is known as a “non-arm’s length” loan. They have a friend or relative who is looking to invest RRSP funds, and one way to do that is to fund a mortgage. This option is only suited for a borrower that has saved at least 10% of their own down payment and require a top up. Because the person has a close relationship with the lender, it’s called a “non-arm’s length” transaction. There are some rules that the Canadian government has instituted to ensure that the mortgage is a fair one. Some of these include provisions that the interest rates have to be close to what the market is currently offering.
The beautiful cousin to the “non-arms length loan” is the commonly executed gifted down payment. Gifted Down Payments are from immediate family members can be used provided they are verifiable and non-repayable. Gifted down payments are not required until closing date. Some exceptions do apply to lender specified programs. The funds might come through from a well-of-parent or from a rich relative who has the money to give and wants to help you get started on your way as an adult. It is crucial, though, that you secure documentation from the person giving you the money that you won’t have to pay the money back, so it doesn’t get counted in your debt-to-income ratio. This document is referred to as a Gift Letter. You want to make sure that you don’t run afoul of the tax laws in Canada regarding gifts, but if the tax you would have to pay is less than what you would pay in interest on a private mortgage, it can still be an advantage for you.
For people who don’t have a relationship with someone with RRSP funds to loan or a family member that will simply give them the down payment leaves another option for a down payment. If you want to get into your house sooner than later, you can opt for a mortgage flex-down high ratio mortgage. Flex Down Mortgage With flex down mortgages, you borrow the money for your down payment from a third party — someone other than you and the bank extending you the mortgage. This could be immediate or extended family member, a friend of yours, a private third party, funds from a credit card advance, or a personal loan. The primary requirements is that this party have no tie to the sale of the house — so it can’t be the seller who lends you the down payment, and the bank can’t extend you a second loan to cover the down payment. Your eligibility for this sort of situation depends on your credit and income affordability, because you are taking out not one but two loans to cover the purchase of the property, and you have to make both payments each month to ensure that you stay in the home. If your credit is shaky, even if your income is high, the bank may balk at extending you this sort of loan.High Ratio means that the loan-to-value ratio is higher than 80 percent) for a shorter term. You’ll have to pay private mortgage insurance, but you’re at least building equity. Then, you keep saving for that down payment at renewal, and you can go in with a down payment that is high enough to avoid PMI going forward. You can also generally get a lower interest rate from lenders if you are using a conventional loan (with at least 20 percent down) than you can with a high-ratio loan, because the bank has less risk in the deal — if they have to foreclose, they have a better shot at getting their money back even if prices sink
In some cases, the homeowner may be willing to issue a carry back loan for you also known as a vendor take back mortgage. In this case, the homeowner becomes the lender upon closing and a mortgage is registered on title in lieu of the funding shortfall. It’s still a second note for you to pay, but you are in the house and can start building equity. This is a choice that some homeowners make if they have paid off their own mortgage and have a vested interest in selling the house in a short amount of time. That way they can make the money off the equity a second time, through your payments with interest, and they can go ahead and move into that retirement cottage they’ve picked out without having to worry about maintaining their original house while they live across the country. It’s also a choice for homeowners who are having a hard time selling their home and, while they may have their own mortgage to pay off with the proceeds, have enough equity to be able to issue you a new loan for the down payment and still pay off their own mortgage.
If you are looking to buy a house but simply can’t come up with the down payment, don’t let that stop you. Give us a call at Amansad Financial, and we will do our best to connect you with one of our resources.