Mortgage Down Payment

What is a down payment?

A down payment is an amount of money put towards the payment of a house. Usually the house is paid off using a mortgage loan to pay off the rest of the amount. A down payment is used to make sure that lenders can get back their money should the borrower default on their payments.

With mortgages, the house being bought is used as collateral if the loan isn’t paid in full. This way, if the borrower defaults, the lender can sell the house to recoup the money that is owed to them. Down payments are typically required to protect the lender. A down payment demonstrates that the homebuyer is both responsible and serious about his mortgage.

The larger your down payment, the larger the mortgage size you qualify for and the smaller your monthly payments and total interest payments will be.

What amount is required for a down payment?

  • You will need a down payment of at least 20% to be able to secure a conventional mortgage. In this situation the homebuyer does not need to purchase CMHC mortgage insurance.
  • Mortgage loans are granted for as little as 5% down payment but they are often a high-ratio mortgage. CMHC mortgage insurance is required for mortgages with down payments less than 20% of the value of the mortgage.

Zero Down Mortgage

If you are looking for a no down payment mortgage you should speak with a Loans Canada professional. Typically these types of loans require applicants to have great credit scores, stable employment and other qualifications. To see if you qualify for a mortgage with zero money down, please request a call back.

Conventional Mortgages

  • This type of mortgage is offered with fixed or variable interest rates. A conventional mortgage does not need to be insured because the lender would be able to sufficiently recover its funds by selling the house should the borrower default.
  • You must prove to the lender that you can make a down payment. The higher the down payment the better. With a higher down payment you will benefit from lower monthly payments, lower interest payments and thus greater savings. You are also more likely to be accepted for your mortgage and obtain a better rate.
  • A larger down payment will reduce the cost of your loan both in terms of interest paid in total and monthly payments

High-Ratio Mortgages

  • If you cannot provide a 20% down payment you can still get apply for a mortgage.
  • A high ratio mortgage requires the borrower to buy default (CMHC) insurance.
  • A high-ratio mortgage is a bigger risk for the lender. The lender sees the mortgage as a riskier loan than a conventional mortgage with a higher down payment and may in turn assign a higher interest rate.
  • High-ratio mortgages tend to cost more than a conventional mortgage due to insurance costs.

Using RRSP funds as a down payment

  • You may use funds from your RRSPs as a down payment on your house.
  • $25,000 per person may be used from RRSP funds towards a down payment
  • $50,000 may be used for a couple

Down payment sources

Where can you get the money you need for your mortgage down payment? Typically people get this sum of cash from savings or selling some of their assets (such as stock or bonds), but other ways of obtaining this money include:

– Borrowing from family
– Gifts from friends or family
– Other borrowed funds