Is there a criterion for determining an appropriate down payment when buying a property?
Some are content with 5%, others pay up to 30% and even 40% of the value of the property when they go to the notary.
Typically, the higher the down payment, the lower the mortgage, the lower the upfront cost because you pay less interest. But this logic is not infallible.
Many buyers turn to CMHC-insured loans because they simply cannot afford a 20% down payment on the value of the desired property (a requirement for lenders). Understandable in a real estate market that has been steadily increasing for years.
However, some buyers who bleed for a 20% down payment enjoy lower interest rates if they qualify for a mortgage when the lender has to perform the famous stress test, compared to those who don’t pay more than 5%.
Collect his nest egg
Before thinking about buying a property, it is necessary to set a savings goal. For example, 20% of a $350,000 house costs $70,000; 5% is $17,500. Quite a difference!
How do you intend to raise these sums? Through savings. So a transfer of $50 per week, factoring in compound interest, equals $14,734.65 after five years.
Many first-time buyers build up their down payment with gifts (or loans) from their parents (known as love money) or an inheritance.
Others use government programs, including the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 ($70,000 for a pair) from your RRSPs with no tax penalty. From the second year after your payout, you have up to 15 years to repay your RRSP. However, you will not benefit from the return on your investments during this time.
A new program, the Tax-Free Savings Account for First Time Home Buyers (TFSAP), a type of real estate TFSA, can raise up to $8,000 a year ($40,000 maximum).
If your household income does not exceed $120,000 and your down payment is 5%, you may qualify for the First-time Home Buyer’s Incentive (FPI) and qualify for a 10% interest-free loan repayable in 25 years and your Pension increases down payment.