Is there a criterion for determining an appropriate down payment for the purchase of a property?
Some are content with 5%, others pay up to 30% and even 40% of the value of the property when they go to the notary.
Normally, the bigger the down payment, the lower the mortgage, the lower the cost of acquisition, because you pay less interest. But this logic is not infallible.
Many buyers rely on CMHC-insured loans because they are simply unable to provide a down payment of 20% on the value of the coveted property (a prerequisite for lenders). Which is understandable considering a real estate market that has been rising steadily for years.
That said, some buyers who bleed themselves to advance a 20% down payment enjoy lower rates when they qualify for a mortgage, when the lender must apply the famous stress test, compared to those who do not than 5%.
Collect his nest egg
Before considering the purchase of a property, it is necessary to establish a savings objective. For example, 20% of a $350,000 house is $70,000; 5% is $17,500. Quite a difference!
How are you going to raise these sums? By savings. Thus, a transfer of $50 per week will yield $14,734.65 after five years, taking compound interest into account.
Many first-time buyers build their down payment with gifts (or loans) from their parents (known as love money) or an inheritance.
Others use government programs, including the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 ($70,000 for a couple) from your RRSPs without tax penalty. You have up to 15 years to repay your RRSP from the second year following your withdrawal. However, you do not benefit from the return on your investments during this period.
A new program, the Tax-Free Savings Account for First Time Home Buyers (TFSAP), a kind of real estate TFSA, can raise up to $8,000 per year (capped at 40 $000).
If your household income does not exceed $120,000 and your down payment is 5%, you may qualify for the First-time Home Buyer’s Incentive (FPI) and qualify for a loan 10% interest-free, repayable in 25 years, which will boost your down payment.