Understanding the down payment rules in Canada
In Canada, there are specific rules when it comes to home down payments. Such rules are dependent on the total purchase price of the property you are eyeing to buy:
- For homes that cost $500,000 or less: your minimum down payment will be 5% of the property’s total purchase price.
- For homes that cost between $500,000 and $1 million: your minimum download payment will be 5% for the first $500,000 and 10% on any amount above $500,000.
- For homes that cost $1 million or more: your minimum down payment will be 20% of the property’s total cost.
Calculating the down payment for a $300K house
As your chosen property costs $300,000, your minimum down payment will be 5% of the total cost.
Sample calculation: $300,000 x 0.05 = $15,000
Mortgage default insurance: The cost of borrowing more
If your required down payment is below 20% of your chosen property’s total cost, you will be required to purchase a mortgage default insurance. This type of insurance is meant to protect the lender in case you, the borrower, end up defaulting on your loan. The premium for this type of insurance will be added to your mortgage and should be paid off over time.
As for its cost, your down payment amount will determine how much your mortgage insurance premium will be.
Option to reduce your down payment
If you think that $15,000 is a bit much for you to pay for your down payment, here are some options to help you reduce your down payment:
First-time home buyer incentive (FTHBI): this is a shared-equity mortgage program that is being offered by the Canadian government. As its name connotes, this is meant to assist first-time homebuyers in reducing their down payment by 5% or 10% of their property’s total price.
- RRSP home buyers’ plan (HBP): first-time homebuyers will be able to withdraw up to $35,000 from their RRSPs and use this for their property down payment, free of taxes.
- Gifts from family: if you’re lucky, you may receive a gift from a family member that can help you pay your down payment.
- Borrowed down payment: there are some lenders who may lend you the required amount for your down payment from a different source, such as a personal loan or a line of credit.
Important considerations:
- Closing costs: In addition to your down payment, you will also need to seriously budget for the closing costs, which will include legal fees, land transfer taxes, home inspection fees, and more.
- Debt-to-income ratio (DTI): lenders will also assess your DTI, they will be comparing your total debt payments to your gross income to be able to determine how much you can borrow.
- Pre-approval: getting pre-approved for a mortgage will give you a better idea of how much you can afford and how much your monthly payments will be.
Determining how much your down payment will make it easier for you to make a final decision on the property that you will be purchasing. While the minimum down payment required for a $300,000 house in Canada is $15,000, it will be very helpful if you will try to pay more as this will help you significantly lower your mortgage amount, monthly payments, and mortgage insurance premiums.
Try to explore different options to help you maximize your down payment so you can secure the best mortgage terms for your current financial situation.
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