Exploring Down Payment Sizes

How Down Payment Sizes Affect Mortgage Terms

Grasping the nuances of mortgage down payments is crucial for a seamless and successful home-buying journey in Canada. In this guide, we'll delve into the essentials of down payments in 2024, helping you to prepare adequately and avoid any unexpected hurdles before closing:

1)      Understanding the Basics of Minimum Down Payments:

Whether you're a first-time homebuyer or looking to upgrade, the minimum down payment in Canada starts at 5% for the initial $500,000 of your home's purchase price. For instance, a $500,000 home would require a $25,000 down payment. For amounts exceeding $500,000, the requirement shifts to a 10% down payment. So, purchasing a $750,000 home means a $25,000 down payment for the first $500,000 and an additional $25,000 for the remaining $250,000.

2)      Exploring Variations in Minimum Down Payments:

Down payment requirements differ based on the type of property you're considering:

• Owner-occupied homes: 5% on the first $500,000 and 10% on the remaining amount.

• Owner-occupied homes (CMHC premium avoidance): A 20% down payment eliminates the need for CMHC insurance.

• Rental properties: Typically, lenders require a minimum of 20% down.

• Second homes: A minimal 5% down payment is needed, with 20% negating the CMHC/default insurance fee.

3)      The Impact of Down Payments on Mortgage Rates:

Surprisingly, your down payment size is a significant factor in determining your mortgage rate:

• Less than 20% Down Known as 'high ratio' or CMHC-insured mortgages, less offer competitive rates due to the lender's reduced risk.

• 20% Down: This is the threshold where CMHC protection ends, introducing a slight rate increase due to heightened lender risk.

• Over 25% Down: As the down payment increases, the lender's risk decreases, leading to more favourable rates.

4)      Advantages of a 20% Down Payment:

Achieving a 20% down payment might mean a marginally higher rate than a CMHC Insured mortgage, but the overall savings are substantial, often amounting to thousands of dollars. While the rate might be slightly higher, the total borrowing cost is lower. A 20% down payment also unlocks the option for a 30-year amortization period, offering additional financial flexibility and possibly enabling a higher purchase price.

For a tailored understanding of how down payments can affect your mortgage journey and to explore whether the 20% threshold is the optimal path for you, consider reaching out.  We can provide personalized guidance and ensure you make the most informed decision for your unique situation.

Stay tuned for Part 2 - Acceptable Down Payment Sources for Your Mortgage …