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Do you plan to buy a property in Canada but don’t know how much money you’ll need for a down payment? For those who are new to the property buying process, a down payment is an initial payment made when purchasing a property, while the rest is paid over a set period of time. This amount will be deducted from the total acquisition price of the property. In this article, we’ll go over everything you need to know about making a down payment on a Canadian property.
Minimum Down Payments
The amount you need to put down depends on the purchase price, the type of property you want to buy and your real estate goal. For example, the minimum down payment will vary, depending on if you want to buy a primary residence or if you want to invest in rental property.
Therefore, if you are buying a flat or a duplex for less than $500,000, you need to put down 5% to secure financing. For a triplex or fourplex that costs between $500,000 and $999,999, you will need to put down 10% to be eligible for financing. For more than five assets, you have to provide a minimum down payment of 20% to get financed.
In all cases, you must live in the same property to be able to put down the above-mentioned percentages. For example, if you are buying a triplex, to be able to provide the 10% down payment, you must live in one of the flats and rent the other two. If you wish to invest in a rental property, irrespective of the type (i.e. a triplex, a fourplex, etc.) but decide not to live in the building and to rent out all units, you will need a minimum down payment of 20%.
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The required down payment may be higher if you are self-employed. In most cases, you will make the down payment from your own funds. The solution would be to put money aside for the down payment and reduce your debts to a minimum. Alternatively, if you lack the required down payment, it can be obtained through the Home Buyer’s Plan or Mortgage Default Insurance.
Home Buyers’ Plan
If you meet all the requirements of the Home Buyers’ Plan, you may be able to get a down payment. This plan allows you to withdraw up to $35,000 tax-free from your Registered Retirement Savings Plan (RRSP) to buy a home. You then have 15 years to repay the amount withdrawn.
Before engaging in this plan, it is important to consider whether you will be able to make the payments. Also, make sure that withdrawing the funds from your RRSP will not affect your retirement savings. As far as taxes are concerned, note that not making the payments may end up costing you more.
Mortgage Default Insurance
This insurance protects you in case of default. If you want to provide a down payment of less than 20% of the value of your home, you need mortgage default insurance. If you are self-employed or have a spotty credit history, you may be required to get mortgage default insurance, even with a 20% down payment.
Mortgage default insurance is not available if the purchase price of the home is $1 million or more or if your credit does not meet the insurance company’s criteria. If necessary, your lender will arrange mortgage default insurance on your behalf.
The amount you pay for mortgage default insurance is called the premium. It varies between 0.6% and 4.50% of your mortgage amount. Remember that your premium will depend on your down payment. The higher your down payment, the cheaper your insurance premium will be.
You have two options for paying your premium: Either add it to your mortgage or pay the full amount. If you add the premium to your mortgage, you will pay interest on the premium at the same rate as your mortgage.
Some provinces in Canada such as Ontario, Manitoba and Quebec impose provincial sales tax on mortgage insurance bonuses.
How To Calculate Insurance Premiums
Let’s assume you want to buy a house that costs $400,000. Your down payment is $56,000. This down payment is 14% of the purchase price. Since your down payment is less than 20%, you need mortgage default insurance.
Your premium will vary depending on the amount of your down payment. In this case, your premium would be 3.10% of your loan amount. To calculate your mortgage default insurance premium, deduct your down payment from your home purchase price which in this case is $344,000. Then take your mortgage amount and multiply it by the insurance premium. Your mortgage insurance premium is $10,664. Then add the premium to your mortgage which will now total $354,664. You now have to pay more interest, since your mortgage amount has increased.
For example, let’s assume you plan to pay off this mortgage over 25 years at an interest rate of 4%. Compared to someone with a 20% down payment on the same home, you will pay $20,038 more in interest for your mortgage default insurance premium. In total, your mortgage default insurance is $30,702.
Finally, you should know that it is possible to invest in real estate in Canada with permanent resident status. This is a status that gives foreigners the same rights as a Canadian, except for certain public service jobs and the right to vote. With this status, you will no longer have to put down 35% of the contributions that are required of foreigners. For example, if you are a Chinese or a French national who wants to come to Canada to buy a property, you will have to put down a minimum of 35% to get financing from a banking institution.
Depending on your objective and the type of home you are looking to buy in Canada, you now have an idea of the different down payments you will need to make.
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