One of the most difficult parts of investing into a property is saving enough money for a downpayment. However, sometimes it’s more beneficial to have the minimum downpayment than waiting for years to accumulate enough savings while the real estate prices continue to climb.
What’s the minimum amount?
The minimum downpayment on a house or condominium is 5% of the purchase price, up to $500,000 and 10% for remaining portion of the price above $500,000. A downpayment of less than 19.99% is considered a high-ratio mortgage and would have to be insured with CMHC. (Canada Mortgage and Housing Corporation).
The insurance is mandatory if the down payment is less than 19.99%. The insurance premium is indicated in the below chart, courtesy of CMHC website. Looking at the chart, you will see if your downpayment is 5% then the insurance premium is 3.85% of the mortgage amount.
|Premium on Total Loan||Premium on Increase to Loan Amount for Portability and Refinance|
|Up to and including 65%||0.60%||0.60%|
|Up to and including 75%||0.75%||2.60%|
|Up to and including 80%||1.25%||3.15%|
|Up to and including 85%||1.80%||4.00%*|
|Up to and including 90%||2.40%||4.90%*|
|Up to and including 95%||3.60%||5.65%*|
|90.01% to 95% —
Non-Traditional Down Payment**
The benefit of contributing a lower downpayment amount is having the opportunity to be a home owner sooner. The insurance premiums, if stretched over the 25 year amortization period of the mortgage are minimal. For example, if the insurance premium is $5000 and the mortgage length is 25 years, technically the annual insurance premium is only $200, stretched over 25 years.
How much do you need for a downpayment vs. mortgage?
To find out how much you need as a down payment on a house a mortgage pre-approval is recommended. A Pre-approval is a mortgage ball park amount that you may be approved for. A pre-approval does not mean you are approved for the mortgage, however it is a healthy indication that you will be approved for this amount.
For example, if you are looking at properties ranging from $250,000 – $300,000, the down payment for such properties are minimum of 5% which equal to $12,500 – 15,000. This means that the mortgage amount will be $237,500 – 285,000.
How do I save for a downpayment?
Starting a disciplined savings plan is crucial in accumulating your down payment portion. Start with whatever amount you can on a bi-weekly or monthly basis and continue to contribute on a regular basis. It is even better when your savings plan is pre-authorized so you don’t forget to save on a regular basis.
Consider investing your savings into an investment portfolio, depending on your risk profile, investments vary from conservative to aggressive. If you live in Canada and you are a permanent resident, ensure you have a Tax Free Savings Account (TFSA), and you will not get taxed on the interest you make.