The Down Payment…
and the not so scary, Mortgage Insurance
As a follow up to the appropriately named post The World’s Greatest First Time Buyers’ Guide…Period we wanted to dig a little deeper into the Down Payment and Mortgage Insurance. There’s a ton of information to absorb when starting the buying process so we hope that this will arm you with some of the knowledge you need to keep the surprises to a minimum. You have done your part by coming to us so sit back and take in the wonderful world of Down Payments!
A down payment, along with a mortgage is required unless you are able to pay cash. If you are able to pay cash feel free to stop reading and call us immediately! A mortgage is a loan from a lending institution to you with your new home being the collateral. While real estate in Toronto is one of the safest, long term investments available, your bank is not willing to take all the risk. Fortunately they are not big gamblers on this side of the border. If you want to buy a house with no money down, please see United Sates of America circa 2008. In order for you to demonstrate your commitment to home ownership, and to put some of your skin in the game you would be expected to cover 20% of the purchase price with your down payment. The bank will cover the other 80% which you can pay back over the next 25 years or so. If you’d like our unbelievably detailed and fantastic Buying/Selling Spreadsheet, contact us and we’ll send it over. It outlines all payments, rates, net figures, everything!!!
For example, if we use $500k as the cost of your new home that would mean a $100k down payment is required. For the vast majority of first time home buyers this would make buying a home in Toronto unattainable. But don’t lose hope, keep reading!
To address this barrier to home ownership, and drive the economy, there is an option available for First Time Buyers called a “high ratio mortgage”. This gives you the option of reducing your down payment from the traditional 20% to as low as 5%, which in our example drops the down payment from 100k to a much more manageable 25k. The reason the bank is willing to take this 5/95 split of the risk is because the high ratio mortgage includes “Mortgage Default Insurance” which is regulated by the Canadian government and available from the CMHC, Genworth and others through your lending institution. To summarize, the bank is willing to lend you more money, with a smaller down payment, because if you default on your mortgage they will get repaid from the insurance on your mortgage. Win Win.
Are there any disadvantages? Well the insurance isn’t free. There is a premium added to your mortgage of 2.75% if the ratio is 5/95 and you are on the hook for it. Using the same example of a $500k home, with a 25k down payment, the cost to you of going with an insured high ratio mortgage, instead of a conventional one with 20% down, is $13,062.50 plus HST. Unlike other closing costs (Land Transfer Tax or Legal) this amount can be added to your mortgage. While $13k isn’t chump change you don’t need to pay it up front and is easier to do then finding $75k in between the cushions of your couch. Here’s a table to explain the specific costs depending on your down payment and financial situation.
In addition there are tax credits (first time buyers are not entirely exempt from paying Land Transfer Tax as some would have you believe. Read this to learn more) for first time buyers to help cover closing costs, insurance premium rebates for energy efficient homes or green renovations and options to finance improvements upon-purchase of your new home. If you would like to talk about any of this in more detail or have any questions please leave a comment below or contact us .