Your Down Payment

To pay for your new home, you will put up some money, and your mortgage lender will kick in the rest. The minimum required down payment is five percent of the purchase price, and if your new home costs between $500,000 and $1,000,000 you must put up ten percent of that portion.

On top of that, mortgage lenders also want to see you have enough additional money on the day of closing for costs such as legal fees, land transfer tax, PST on the CMHC insurance premium, possible property tax advance payment, and things like utility hook ups and moving costs.

Typically, they will want to see an additional 1.5% of the purchase price for these unavoidable miscellaneous costs. Your actual closing costs will vary – especially they will be higher if you are not a first time buyer and you are living in Toronto.

Old school thinking says you should first save up at least a 20 percent down payment before you buy.

And that can make sense if your local real estate market is stagnant. There may be no rush. And if you do have 20% or more, you can avoid the mortgage default insurance.

But in markets like Toronto and Vancouver, waiting has been EXTREMELY COSTLY for many years. As long as their markets remain buoyant, you will be well served by fast tracking your home purchase.

Rob Carrick of the Globe and Mail says “Down payments are one of the least strategized parts of home buying, and yet they can have a big impact on your total long-term cost of owning a house. The conventional wisdom about 20-per-cent down payments is right on the money, but not if you’re set on buying in a hot market. Either jump in now or resolve to wait and save indefinitely for sanity to return.”

In September 2015 Rob conceded that waiting to save your 20% down payment can prove costly in hot markets, as there can be a huge opportunity cost to waiting…..It’s time for a fresh look at the case for avoiding the cost of buying it.

This one’s for the housing true believers out there, by Rob Carrick of The Globe and Mail

What if you have no down payment?

Many buyers are anxious to buy a home, but do not have as little as a five percent down payment saved up. They are frustrated being on the sidelines and watching everyone else grow their home equity.

So, with all the recent changes to mortgage rules, is it still possible to buy a home with no down payment? The answer is YES.

Somebody has to come up with at least a 5% down payment, but it does not have to be you the borrower.

You could borrow your down payment. Mortgage agents and brokers have access to lenders who are okay with this. It’s called a Flex Down Payment mortgage. Here is Canada Guaranty’s Flex 95 Advantage program which offers a flexible down payment option for borrowers with a strong credit history.

You do have to be careful the new debt you take on does not adversely affect your debt service ratios to the point where you may no longer qualify for a mortgage. If it is from revolving credit, practically all lenders will impute a monthly payment of three percent of the balance, regardless of the actual arrangement you have.

A gift

With the cost of home ownership so high these days, many young people turn to their relatives for help with their first down payment. This is fine with the lenders, as long as the money is a pure gift, not a loan, and you both sign a letter to this effect.

The Takeaway

If you have excellent credit, stable employment, and a healthy income, buying a home without having actually saved up for your down payment may work for you.

Make sure you review your finances in detail with a mortgage specialist before you make a binding commitment though. This strategy is not for everyone. Consider this approach very carefully – it’s not for everyone.

February 2016 changes to the minimum down payment rules by Rob McLister of Canadian Mortgage Trends

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