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Down Payments: 5% vs 20%

Down Payments: 5% vs 20% 

When purchasing a home, one of the most important decisions you’ll make is the size of your down payment.  In Canada, the minimum amount required for any home purchase is 5% for an owner occupied home and 20% for a rental property.  Owner occupied homes with 20% or greater down payment do not require mortgage loan insurance.  Here are some key elements to consider when deciding between how much down payment is right for you.

5 % Down Payment

In Canada, if the down payment on your new home is less than 20%, you are required to have mortgage loan insurance.  This type of insurance is typically calculated as a percentage of your mortgage and is based on the size of the down payment and added directly to the principal portion of your mortgage.  Despite the buyer paying the premium, mortgage loan insurance is really in place to benefit the lender; if the borrower ever defaults, the proceeds of the mortgage insurance will be paid to the lender.  

There are 3 mortgage insurers in Canada: Canada Guaranty, Genworth Canada, and Canada Mortgage and Housing Corporation (CMHC).  To give you an idea as to what mortgage loan insurance might cost, the following premiums are from the most common insurer, CMHC: 

CMHC Premiums
Down payment of 5% = 3.6% Premium on total loan
Down payment of 10% = 2.4% Premium on total loan
Down payment of 15% = 1.8% Premium on total loan 

Using these premiums from CMHC, the following example shows the cost of mortgage loan insurance for a mortgage on a home with a purchase price of $400,000:

5% down payment = $20,000
Mortgage insurance required = $13,680
Mortgage required = $393,680
Premium used = 3.6%

Additionally, a buyer who puts down between 5% and 19.99% will have what is considered to be a high ratio mortgage and is limited to a 25-year amortization.  With a high ratio mortgage, your payments will be higher than a conventional mortgage which can be amortized over 30 years. 

20 % Down Payment

In Canada, a down payment of 20% is considered a conventional mortgage and does not require mortgage loan insurance.  With this type of mortgage, you have the option to maximize your amortization period up to 30 years to decrease your required monthly payments.  Additionally, a buyer with a conventional mortgage will have more immediate equity in their home due to the size of their down payment being larger.  The more immediate equity a buyer has, the more added products a lender will be able to offer, such as a home equity line of credit (HELOC).  The main downfall for a conventional mortgage is that interest rates are slightly higher due to the lack of mortgage loan insurance.  Overtime however, a slightly higher interest rate will usually outweigh the cost of mortgage loan insurance.

While the cost of borrowing may be lower with a conventional mortgage, it takes more time to save for a larger down payment.  The questions you have to ask yourself are: does taking on the cost of mortgage loan insurance outweigh paying down someone else’s mortgage?  Does saving for a conventional mortgage make sense over paying mortgage loan insurance?

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