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Greater Savings with a Larger Down Payment


 

The size of a down payment can vary. Depending on the type of mortgage, down payments generally range from 5% to 20% of the purchase price.

 

To obtain a conventional mortgage, home buyers are required to put down at least 20% of the purchase price or appraised value (whichever is less) as a down payment. If you don't have the necessary time or resources to save a full 20% down payment, you can choose a high-ratio mortgage and buy a home with a down payment of as little as 5%. This option is called a high-ratio mortgage and it requires you to purchase default insurance.

 

Whether you choose a conventional or a high-ratio mortgage, one thing is almost always certain: the larger your down payment, the more you save in the long run. A larger down payment...

 

  • Reduces the amount of your monthly principal and interest payment

     

  • Reduces the total amount of interest you pay over the life of your mortgage

  

Insuring Your High-Ratio Mortgage

CMHC or Genworth (formerly GE Capital) may insure a mortgage for up to 95% of the lending value of the house. Therefore, purchasers only need a 5% down payment. Eligible borrowers include anyone who buys a home in Canada intending to occupy it as their principal residence.

 

Purchasers can use up to 32% of their gross family income for payments of mortgage principal and interest, property taxes and heating. A buyer's total debt load (including consumer loans, etc.) cannot exceed 40% of the gross family income.

 

People who insure a mortgage loan with CMHC or Genworth pay an application fee and a premium. The application fee ($75 - $235) covers the costs incurred by the insurer to review the application. The premium is based on the down payment and loan amount. Typical fees range from 1.00% to 3.25% of the principal amount of your mortgage.

 

Cost: Premiums range from 1.00% to 3.25% of the mortgage loan amount and can be paid up front or added to the principal amount of the mortgage.
Loan Amount: Up to 95% of the lending value of the house.
Mortgage Term: To be set by the lending institution.
Max. House Price: Varies by market.

 

Buying a Home with No Down Payment

Prior to the financial crisis in 2008, it was possible to combine a high ratio mortgage with certain bank's cash-back mortgage offers, to purchase a home with zero down payment.  The drawback to these programs was that they added significant long-term costs to the borrower, and had increased restrictions on the borrowing terms. They were to be considered as a last resort; borrowing from RRSPs, saving-up for a couple of years, and borrowing against future inheritance are some alternatives that should still be explored first.

 

With banks and the OFSI having tightened lending criteria, no down payment mortgages have all but disappeared from the market. Please contact me for the latest information on current borrowing options.

  

Ask about the RSP Home Buyers' Plan  

The RSP Home Buyers' Plan (HBP) lets a first-time buyer withdraw up to $20,000 from RSPs for a home purchase. The withdrawn amount must be repaid within 15 years, subject to a minimum annual repayment that is 1/15 of the amount withdrawn. If the full $20,000 is withdrawn, the minimum annual repayment is $1,333. If less than the minimum is repaid in any particular year, the balance is added to the taxpayer's income.

Want more information? Check the Canada Customs and Revenue Agency Publication.

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