When purchasing a home, whether you are a first time home buyer or you have purchased multiple homes, you are required to provide a down payment. In Canada the minimum down payment that is required on a home that you are going to live in is 5% of the purchase price. Now if you start looking at homes above $500,000 the minimum down payment changes. It is still 5% on the first $500,000 and then 10% on any amount over $500,000 up to $999,999. Once you hit $1,000,000 purchase price the minimum down payment increases to 20%.
Mortgage Default Insurance and Down Payment
If your down payment is less than 20% of the purchase price, you will be required to have mortgage default insurance, commonly referred to as CMHC fees. It protects the lender in instances where the borrower defaults on their mortgage payments. The only way to get around this premium is to provide a down payment of 20% or more. There are different premium amounts depending on the down payment provided so even if you cannot get to 20% down it might make sense to put more than 5% down. The premiums are generally included in your mortgage, but can be paid upfront if that is what the borrower desires.
Sources of down payment
Your down payment can come from a variety of sources. It can come from traditional sources such as your personal savings account, a TFSA, am RRSP, or a non-repayable gift from an immediate family member including parents, grandparents, siblings, children,
or grandchildren. Depending on the lender and mortgage default insurer, it can also come from non-traditional sources or borrowed down payment. This is called a flex down mortgage and the debt incurred for down payment must be able to be serviced by your income. These non-traditional sources include gifts from non-immediate family members, lines of credit, or loans.
It is important to discuss your down payment with your mortgage broker as the size of your down payment directly affects the purchase price you can afford, your total mortgage and monthly payments, and mortgage default insurance premiums.