What is a mortgage?
You may only be able to pay a portion of the purchase price when buying a home. A down payment is an amount you pay. You may require the assistance of a lender to finance the remaining expenditures of the house purchase. A mortgage is a loan that you get from a lender to help you pay for your property.
A mortgage is a contract between you and your lender that is legally binding. It describes the terms of your loan and is secured by a piece of real estate, such as a house or a condo.
What is a minimum down payment?
The amount of money you put down on a house is referred to as a down payment. The down payment is deducted from the purchase price of your house by your lender. The rest of the home’s cost is covered by your mortgage.
The amount you’ll need for a down payment is determined by the home’s purchasing price.
In Ontario and across Canada, the minimum down payment is 5% of the first $500,000 in property purchase price. In other words, a $500,000 home would require a $25,000 down payment.
However, if the purchase price is greater than $500,000, a 10% down payment is required. For example, if the home costs $750,000, the down payment would be $25,000 on the first $500,000 and then $25,000 on the next $250,000 (for a total of $750,000 in this example).
The key to understanding this concept is to distinguish between the first $500,000 (5 percent down on this amount) and the fact that every dollar of the purchase price above $500,000 requires a 10% down payment. Mortgage loan insurance is required if your down payment is less than 20% of the buying price of your home.
Your lender may ask for a greater down payment if you’re self-employed or have a poor credit history. The minimal down payment is usually required to be paid out of your own pocket. It’s preferable to save for a down payment and pay off your debts first.
The different kinds of minimum down payment
The following is a list of the various down payment minimums available on the market, categorized by purchase type.
- Owner-occupied home: occupied home: 5% on the first $500,000, 10% on the additional $500,000 – add the two to get the minimum.
- Owner-occupied home: To avoid the CMHC charge, a 20% down payment is required (as much as 4 percent if less than 20 percent is applied).
- Rental property: The majority of lenders need a 20% down payment on a rental property.
- Second-home: With as little as a 5% down payment, you can purchase a second home for recreation, family, or other uses. There is no CMHC/default insurance fee if you put down 20%.
Is making just the minimum down payment for a mortgage bad?
The size of your down payment has an impact on the mortgage options available to you. For properties under $500,000, the minimum down payment is 5%, which means you’ll have a higher mortgage and a CMHC insurance charge of up to 4%. While you will pay less in interest today, you will pay more in interest in the long term if you make a larger down payment at the same interest rate.
Another downside is the mortgage stress test, which requires you to demonstrate that you can still make your mortgage payments if interest rates rise. Your monthly mortgage payments may be much greater if you have a larger outstanding mortgage. It will be more difficult to qualify for a mortgage refinance or products like a home equity line of credit (HELOC), which can have loan-to-value requirements if you have less equity in your house.
Another downside is the mortgage stress test, which requires you to show that you can still make your mortgage payments if interest rates rise. Your monthly mortgage payments may be much greater if you have a larger outstanding mortgage. It will be more difficult to qualify for a mortgage refinance or products like a home equity line of credit (HELOC), which can have loan-to-value requirements if you have less equity in your house.
A down payment of 20% or more, on the other hand, allows mortgage lenders additional flexibility if you default on your mortgage or property values fall. As a result, you will not be required to pay for mortgage insurance.
In order to qualify for a mortgage from your mortgage lender, you may be required to make a larger down payment. This could be for a variety of reasons, including being self-employed or having a bad credit history. Even if they don’t have a credit history in Canada, newcomers to the country, such as recent immigrants, may be eligible for a mortgage. However, special programs for newcomers may need a larger down payment.
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