Many first-time home buyers ask us: How much should we save for a down payment on a home? The answer depends on a few straightforward variables. It’s quite common for first-time buyers to have questions, and there’s no doubt that the thought of saving for a substantial down payment on a home may be a big task.
You probably have all sorts of questions. How much will you need to save? Where does your down payment go? And what other costs are involved? Let’s break everything down in the simplest terms.
The following will guide you in getting a close estimate to how much you should save for a home.
WHAT IS A MINIMUM DOWN PAYMENT?
When you purchase a home, you are required to pay a minimum amount of money up front. Your mortgage lender will deduct this down payment from the total purchase price of the home, and your mortgage will cover the rest.
But how do you know exactly how much you need for a down payment? The downpayment amount will depend on the purchase price of your home.
Readers note: the dollar amounts below are subject to change, so be sure to check with your lender about any new rules pertaining to down payments.
IF THE PRICE OF YOUR HOME IS LESS THAN $500,000:
- Your down payment is a minimum of 5% of the purchase price.
IF THE PRICE OF YOUR HOME IS BETWEEN $500,000 AND $999,999:
- You’ll need 5% of the first $500,000 of the purchase price.
- You’ll also need 10% of the portion of the purchase price above $500,000.
IF THE PRICE OF YOUR HOME IS MORE THAN $1,000,000:
- Your down payment is a minimum of 20% of the purchase price.
Of course, these are just minimum amounts. You’re welcome to put even more down on your house. The more you put down, the less your mortgage payments will be.
If you have poor credit history, or if you’re self employed, your lender may require that you put more money down too.
PAYING LESS THAN 20% DOWN? YOU’LL NEED MORTGAGE LOAN INSURANCE
If your down payment is less than 20% of the price of your home, you must buy mortgage loan insurance. Mortgage insurance is required because lenders want to have some kind of guarantee of payment in case you miss your monthly mortgage payments.
Should you default on your loan (e.g.. miss too many mortgage payments), this insurance will pay off the remainder of the loan to your lender. You will lose your home for defaulting of course, but at least the lender will be paid.
Your lender will help you coordinate applying for mortgage loan insurance if you need it.
HOW MUCH DOES MORTGAGE LOAN INSURANCE COST?
Mortgage loan insurance premiums range from 0.6% to 4.50% of the amount of your mortgage. It just depends on the amount of your down payment.
The bigger your down payment, the less you pay in mortgage loan insurance premiums.
You can pay your insurance premium by adding it to your mortgage or as a lump sum up front. If you add your premium to your mortgage, you pay interest on your premium.
The interest rate is the same rate as you’re paying for your mortgage. Also, in Ontario, provincial sales tax is added to monthly premiums too.
GOVERNMENT HOME BUYING PLANS & INCENTIVES
While it may seem like a daunting task to save up for a down payment on a home, there are many incentive programs that can help.
FIRST TIME HOME BUYERS INCENTIVE
First time home buyers may be eligible for a shared equity mortgage with the Government of Canada. With a shared equity mortgage, the government will help you finance the home without interest.
This helps reduce your monthly mortgage payment without increasing your down payment.
Through this First-Time Home Buyer Incentive, when you put 5% down on the house, the government will:
- match your 5%
- be on title with you as an owner of the home
You need to repay this money after 25 years, or when you sell the property. You can also repay it at any time without a prepayment penalty.
Keep in mind: when you go to pay it back, whatever the house appraises at, you could actually owe the government a lot more than what they provided as they are entitled to the equity you’ve built in the home over the years. Ask your lender for more details on this.
HOME BUYERS PLAN (HBP)
If you’ve got some RRSP savings put away, this might be of interest to you.
The Home Buyers Plan (HBP) allows you to withdraw up to $35,000 tax free from your RRSP and put the money towards building or buying a qualifying home.
You will be required to repay any funds withdrawn back into your RRSPs, but you have 15 years to do so.
Failing to repay these funds within that time frame means that you’ll end up paying more in income tax.
And of course, keep in mind that you won’t be earning any growth on the RRSP’s while you have them withdrawn.
If you can make the repayments and you don’t need the funds right away for retirement, this could be an option for you.
Talk to your lender or financial advisor about what they recommend in your situation.
DOWN PAYMENTS SAVE THOUSANDS IN INTEREST
Whether you borrow the money from a relative, save the cash on your own, or take advantage of incentive plans, a bigger down payment is always worth it.
The more money you can pay up front for your home, the smaller your mortgage will be. This can save you thousands of dollars in interest charges.
MORTGAGE AND DOWN PAYMENT RULES ARE ALWAYS CHANGING
Remember that while this information is accurate right now, the rules surrounding mortgages & down payments can change at any time. It’s vital to check what the most current rules or by speaking to a mortgage broker, your bank or your lender.
You can read our recent article The Basic Steps To Getting Pre-Approved For a Mortgage once you’re ready to get pre-approved.