The Importance of the Down Payment

Down payments are a minimum percentage of the total purchase price that is due when you buy a new home, townhouse, or condo. This is required to finalize the transaction and ensure your loan against default; basically, making sure you’re committed and able to pay off the rest of the loan to the lender.

In the past, down payments could be as small as 5% (the minimum in Canada) of the overall purchase price with little to no repercussions. Small down payments are only allowed when accompanied by mortgage loan insurance for any loan with a down payment less than 20%. Now in 2014, though you can still have a down payment of only 5%, things have changed in a way that drastically changes the structure of borrowing.

On May 1, 2014, the Canada Mortgage and Housing Corporation (CMHC), who supplies mortgage loan insurance, increased premiums to reflect increasing capital targets. “For the average Canadian homebuyer requiring CMHC insured financing, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment” (www.cmhc-schl.gc.ca/en/co/moloin/moloin_023.cfm).

Though this may seem like an incremental change, it adds up over time. The best policy when preparing to buy your first dwelling is to have the largest down payment you possibly can. To avoid any of these new regulations you should aim for 20% or higher, as 19.99% and below are subject to the increased premiums. If you cannot afford this option then aim for at least 10%, as the rate between 5-9.99% makes you liable for the highest borrowing rate CMHC offers.

If you have any questions about the changes to CMHC’s mortgage insurance rates or would like to discuss ways to prepare yourself financially to purchase a home, talk to your mortgage professional today!