Wednesday, October 4, 2023 / by Matthew Daniel Tamburello
Matthew Daniel Tamburello
Team Leader & Broker
Trinity Real Estate Consultants
It’s no secret that the Canadian real estate market is growing at a fast pace. But, despite the low-interest rates and increasing supply that has fueled the industry growth over the last few years, current and future homeowners need to think about making a down payment in order to acquire their next properties without any problems.
The real estate market moves at break-beck speeds, so it’s normal to ask yourself “how much down payment do I need for a house?”
In this article, we’ll cover the definition of a down payment and explain how this impacts the type of house you can afford. Additionally, we’ll also give you tips on saving these funds for your dream home.
Understanding Down Payments on Houses
Before going over the average down payment for a house in Canada, it’s crucial to understand the role that these upfront costs play.
Home buyers need to consider all expenses before completing the purchase, including closing costs, the insurance premium, and the mortgage loan interest rate. However, the biggest expense on this list is actually the down payment.
In simple terms, the down payment helps financial institutions determine what type of loan you qualify for. Additionally, these organizations also decide what your interest rate will look like and the duration of your mortgage payments based on the size of your down payment.
As a rule of thumb, you should evaluate different mortgage providers and work with the institution that provides you with the best deals.
If you have a small down payment, you’ll pay a higher home purchase price in the long run due to higher interest rates and other fees. Larger down payments can significantly reduce your property expenses, especially if you have a poor credit history when you get approved for the mortgage loan.
What is a Minimum Down Payment?
In simple terms, the mortgage down payment refers to the sum of money that you pay in order to cover part of the cost of your house. The idea is that the down payment will cover a small part while the mortgage loan will cover the rest right away. Once this process is completed, you’ll only have to make mortgage payments to the bank or financial institution you’re working with.
The down payment impacts every single area of your mortgage loan. For example, a lower down payment means that you’ll have to get a bigger mortgage, which will take longer to pay fully. You’ll also have higher monthly payments if you only cover the minimum down payment requirements.
This is the reason why most home buyers give themselves enough time to save up for down payments that are bigger than the minimum requirement.
These families usually create a down payment fund way before starting the home buying process and only engage their mortgage lender once they have a larger down payment than the bare minimum.
Down Payment for First Time Home Buyer in Canada
If you’re saving up for a down payment as a first-time home buyer in Canada, you may qualify for incentives that will help simplify the whole process.
Select first-time buyers may qualify for a shared equity mortgage loan from the Canadian government. This type of loan allows the Canadian government to pay for your house without interest. In short, this is a fantastic program that can reduce your monthly mortgage payments while allowing you to put down a bigger down payment.
Through the first-time home buyer incentive, you may receive:
- 5% of the purchase price of an existing home you want to purchase
- 5% to 10% of the purchase price of a newly built home you want to purchase
In most cases, incentivized mortgages need to be repaid in 25 years, but they can be paid in a shorter timespan without any penalties.
How Much Property Can You Afford?
The amount of your down payment will help determine, in part, your monthly mortgage payment. That said, this is not the only element that will impact the type and size of the property you can afford.
Mortgage loan providers evaluate a huge list of variables before determining if you qualify for a credit line. In addition, these institutions tailor each buyer’s mortgage loan based on the different financial variables as well as the home’s purchase price. So, if the house you want to buy has a hefty price tag, then you’ll have to save up for a larger down payment.
Let’s take a deeper dive into the different variables that impact your mortgage rate.
Income is perhaps the most obvious variable that dictates the type and size of the property you can afford. Simply put, the more money you make, the larger the mortgage that you could qualify for.
This varies from one financial institution to the next, but the source of the income will also dictate the mortgage amount as well as interest rate. For example, freelancers and small business owners that want to buy a house may be asked for different documents than employees who work for large companies.
If you’re not sure how to go about applying for a conventional loan, you can always reach out to your mortgage provider or contact a real estate agent to help guide you through the process.
In this context, debt refers to any and all financial responsibilities that you need to cover on a recurring monthly basis.
Debt includes all types of payments, including car loans, credit card bills, personal loans, and even student loans. Again, this varies from one lender to the next, but don’t be surprised if your financial institution assesses your projected debt for the next 10 to 12 months before deciding if you qualify for a mortgage.
Even student loans, which usually have deferred payments, are taken into consideration. So, your lenders will also consider how your future student loan payment affects your ability to cover the mortgage monthly payment later on.
Mortgage lenders analyze your income and debt individually, but these institutions understand that both of these variables are intertwined. This is the reason why banks and similar providers analyze the debt-to-income (DTI) ratio, which is a statistic that tells them how much of your monthly revenue is already being spent in other areas.
The ideal DTI ratio varies from one institution to the next, but most lenders don’t want you to spend more than 35% of your income on main loan expenses, mortgage default insurance fees, and other necessary costs.
Additionally, if your monthly expenses like car loans and credit card bills don’t surpass 15% to 20% of your income, you should still make payments of up to 30% of your income.
Your credit score is essential for the approval of all types of credit, including mortgages. You can get a mortgage by simply meeting the minimum credit score requirement, but note that this will likely result in the highest possible interest rates.
Instead of settling for this, you can work on improving your credit before applying for real estate loans and focus on growing your down payment savings at the same time. Both of these steps can help reduce your interest and long-term expenses.
And finally, the down payment. As we covered earlier, a large down payment will result in lower monthly fees and while increasing your chances of getting accepted for the mortgage. If you just adhere to the minimum down payment required, you’ll end up with slightly higher monthly costs as well as a potentially elevated interest rate.
How to Raise Savings for a Down Payment
Canada’s minimum down payment requirements stand at 5% for a previously owner home and up to 10% for newly constructed properties.
However, the amount that you offer as a down payment depends on your current budget and how quickly you can save.
Here are a few tips to help prospective home buyers save up a large lump sum to be used as a down payment:
- Create an automated plan that send money from your regular to your savings account
- Reduce spending as much as possible
- Start by paying all high-interest debts
- Find creative ways to make money, like working a second job online
Getting approved for a mortgage is a huge step and having a large down payment can greatly improve your chances of success. With that said, you’ll need to consider a range of variables before deciding on the best savings strategy, including the price of the home, future payment requirements, and the institution you’re borrowing money from.
To find out more about purchasing high-quality properties while paying minimal commissions, get in touch with Trinity Real Estate Consultants today.