When buying a home, deciding how much to put down largely depends on your financial situation.
The minimum down payment required is based on the purchase price of your home, with 5% being the minimum for properties worth up to $500,000. However, putting down more than the minimum is advisable to avoid paying higher interest rates. While a larger down payment is beneficial, it should only deplete your savings partially, as having cash in hand after closing is also essential for expenses such as buying furniture or renovations. Purchasing a home requires significant financial engagement, and it is crucial to carefully consider all aspects of the down payment before making a decision.
What is a down payment?
The amount you put down when applying for a mortgage is known as a down payment on a house, or the money you first contribute to purchasing your property is a mortgage down payment. It amounts to a fraction of the cost of the home you want to buy. An amount of a purchaser’s money provided to the vendor from his or her resources (not included in a mortgage loan) is termed a down payment.
Three crucial outcomes are influenced by the initial down payment during the course of the mortgage:
- The value of the property you can afford.
- Your mortgage size and installment amount.
- How much do you spend on mortgage default insurance?
How does a down payment work?
The down payment is deducted from the purchase price of a home, and your mortgage covers the remaining amount. For instance, if you make a 20% down payment, your mortgage will cover 80% of the home’s value. The minimum down payment required is based on the home’s purchase price and must come from your funds. It is advisable to save for a down payment and minimize your debts to avoid financial strain.
The home’s purchase price determines the least down payment required:
| $500,000 or less: | 5% of the purchase price. |
| $500,000 to $999,999: | 5% for the initial $500,000 & 10% for the remaining portion of the mortgage. |
| $1 Million or more: | 20% of the purchase price. |
Source: Government of Canada
NOTE: Your lender can demand a higher down payment if you’re self-employed or have a bad credit record.
Ways to calculate down payment:
Formula 1: Savings/ purchase price = the percentage of down payment.
Purchase price of home: $300,000
Amount saved: $15,000
Percentage of down payment: $(15,000/ 300,000) = 0.05, i.e. 5%
Formula 2: percentage of down payment* purchase price = Amount to save
Let’s assume you want to pay 10|% against the purchase price of $400,000. You need to save = 0.10*400,000 = $40,000.
How much should you put down?
Certainly, determining how much to put down on a mortgage loan is a personal decision. However, making a larger down payment can have several benefits and trade-offs. Such as
| Benefits | Trade-Offs |
| ➔ Avoid mortgage loan insurance, as the bigger your down payment; the lower will be the risk involved. | ➔ Waiting longer to buy a home. |
| ➔ Lowering your monthly mortgage installments. As with a larger down payment, the outstanding balance of the mortgage will be lower. | ➔ You may need to pay rent for your present accommodation if you decide to make a larger down payment. |
| ➔ Paying less mortgage interest in the long run. | ➔ You may have less cash available to renovate and purchase new items for your home. |
| ➔ Paying a larger down payment assures more home equity. | ➔ You must consider that a larger down payment could result in a smaller emergency fund. |
Ultimately, the amount you should put down depends on your financial situation and goals.
How to save for a down payment
Budget creation. To determine if you can allocate more funds toward a down payment, create a budget. Track your monthly income and expenses if you don’t already have one. This process will help you identify areas where you can cut back and potentially free up more money for your down payment.
Trimming the expenses. Once you have established a budget, search for areas to reduce your expenses. This can include cancelling unused subscriptions or cooking meals at home instead of dining out. By doing so, you can save money that can be allocated toward your savings goal.
Open a dedicated savings account. To keep track of your savings progress and compute how much more you need to save, consider opening a dedicated savings account specifically for your down payment goal. You may also explore the HBP(Home Buyers’ Plan), which permits a withdrawal of up to $35,000 of your down payment funds from your RRSP (Registered Retirement Savings Plan)while reducing your taxable income. Additionally, you could receive tax benefits by utilizing a tax-free First Home Savings Account. If you use a regular savings account, consider opting for a high-interest account that can earn more interest than a standard one.
Paying off debts. To have more financial flexibility and save money on interest, consider putting additional cash toward settling high-interest debts like credit card debt and other unsecured debts. Doing so will equip you to come up with extra funds for a down payment. Repaying debts also reduces your debt-to-income ratio, aiding in qualifying for a mortgage.
Pause other savings goals. To concentrate on saving for a down payment, you may need to pause other financial goals temporarily, even though it may not be ideal. One way to do this is by suspending regular savings and using that money for your down payment. However, it is crucial to avoid dipping into other savings accounts, such as emergency funds or retirement accounts, to avoid financial difficulties in the future.
AN AMAZING FACT:
Look out for down payment assistance programs: They aim to assist low to moderate-income families in purchasing a home. However, it’s important to note that each locality has unique requirements tailored to its local needs. These requirements and programs are subject to change, and it’s recommended to review all the available programs carefully. To qualify for the programs, you must meet the following requirements:
- Meeting the qualifying criteria:
- Have a moderate household income of less than $100,000
- The value of the property should be less than $500,000
- You must pre-qualify for a mortgage
- You must be a Canadian legal resident
- You must be a first-time home buyer
- Apply to the respective program.
- Receive a 5 to 15% loan on the property value.
- Pay-back percentage of the value later.
The Bottom Line
Saving for a down payment is a vital step toward purchasing your dream home. Although it may appear challenging to accumulate a substantial amount of money, it’s worth noting that a larger down payment can significantly reduce your monthly mortgage payment and save you thousands of dollars in interest over the loan’s lifespan. Achieving homeownership is within your reach with proper planning and budgeting. Don’t delay; take the initiative to start saving today and initiate the first step toward making your dream a reality!
