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.
How Much of a Down Payment Do I Need For a Mortgage in Canada?
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.