Mortgage Wise: Your Down Payment
Figuring out how much you can afford to spend each month is only half of the equation. You may want to make a down payment – the money you put toward the price of a home. A down payment generally ranges from 5 per cent to 25 per cent of the purchase price. Some financial institutions offer no-down payment mortgages. If you have a good credit history, but haven’t been able to save the down payment, this option may be for you. Keep in mind that the higher your down payment, the lower the interest costs over the life of the mortgage.
Coming up with a down payment may be your biggest challenge. If you make a down payment of 25 per cent of the appraised value or purchase price of the property, you can get an uninsured low-ratio or conventional mortgage. On a $200,000 home your down payment would be $50,000.
If you can’t come up with the 25 per cent required for an uninsured low-ratio or conventional mortgage, you can get a high-ratio mortgage – which is usually for more than 75 per cent of the appraised value or purchase price.
A high-ratio mortgage must be insured against default, or non-repayment, by the federal government through the Canada Mortgage and Housing Corporation (CMHC) or an approved private insurer (the lender usually arranges this). The borrower pays a one-time insurance premium to the insurer (the rate varies depending on the amount of the down payment – check with your lender) and additional charges may apply. The default insurance premium is usually added to the principal amount of the mortgage. With mortgage default insurance, if you default on your mortgage, the lender is paid back by the insurer.
Unless you have an inheritance, win the lottery or have generous relatives, getting your down payment together will mean a lot of saving, planning and budgeting. But it will be worth it. The more you put down, the more you’ll save in the long run (a smaller mortgage means less interest to pay). If you don’t have quite enough to make a down payment, try to get on a savings schedule where you set aside a percentage of your gross income each year.
The RRSP Home Buyer’s Plan
Are you a first-time homebuyer? If so, take a look at the federal government’s “RRSP Home Buyer’s Plan.” It allows first-time home buyers to withdraw up to $20,000 per person from their Registered Retirement Savings Plan (without tax liability) to buy a home in .
Among the conditions of the Plan:
You have to enter into a written agreement to buy or build a qualifying home.
The home must be your principal place of residence and includes all types of homes (e.g., single-family homes, semi-detached homes, townhouses, condominium units, or mobile homes).
Your RRSP contribution must be in your RRSP for at least 90 days before you make a Home Buyer’s Plan withdrawal.
You must withdraw funds within the same calendar year in one or more installments. For instance, if you withdraw funds over two years, you will be taxed on the funds withdrawn in the second year. In addition, you will lose contribution room in your RRSP. For more information, contact the Canada Revenue Agency or check the Web site at www.cra-arc.gc.ca.
Of the borrowed funds, a minimum of 1/15th must be repaid each year until the full amount is repaid to your RRSP. Basically, you’re borrowing a tax-free, interest-free loan from yourself. However, bear in mind that you are not earning interest on the RRSP funds used for your down payment. Your RRSP repayment period begins in the second year after your initial funds withdrawal.
Before you cash in your RRSP to buy a home, weigh the pros and cons carefully. Is it worth it to give up the advantages of long-term compounding interest on your RRSPs to buy a home? Can you afford the RRSP payback requirement? If you can get a low mortgage rate and your investments are paying a relatively low rate of return, financing your home with RRSPs may be a wise move.
- Canadian Bankers Association