The down payment on a house is the biggest cost that you have to pay when you are making your dream of purchasing a home come true. It is the amount that you pay upfront at the time of purchasing the house. Paying a down payment comes with its own consequences – paying too much and paying too little. So how much down payment is too much and how much is too little? Let’s find out in this article.
Down Payment on a House in Canada
The below is the minimum down payment requirement in Canada.
|House Rate||Minimum Down Payment|
|Less than $500,000||5 percent of the house purchase rate|
|Between $500,000 to $999,999||5% of the first $500,000 of the house purchase rate|
10% for the portion of the house purchase rate above $500,000
|More than $1 million||20% of the purchase price|
The amount or the percentage of the total house price you decide to pay as the down payment is what lets your broker find you a good deal on the interest rate for mortgages. 9 out of 10 people in Canada buy a house by opting for a mortgage loan which shows how important it is. If you pay too little in a down payment, you will have to pay more on the mortgage because that amount would be higher. On the contrary, if you pay too much in the down payment there are chances that it can impact your financial nitty-gritty and liquidity at present.
In addition to that, you also have to pay other house-related costs like appraisal fees, closing costs, legal fees, and also your EMIs would be there once you close the house deal. Thus, it becomes very crucial that you consider your budget, your income, your future financial condition and based on that decide how much down payment you should pay on the house.
What Should You Consider Before Choosing a Down Payment on a House?
We have compiled a list that can help you in making this decision easily; consider the following four components.
1. Your House Affordability Level
In general, house buyers are likely to afford a mortgage loan that varies from 2 to 2.5 times their income. You get to know about the monthly payment rates once you are pre-approved for a mortgage. It helps the lender to know your credit background and find you a good rate based on your income and your affordability.
You need to know that the journey of buying a house would not end once the deal is closed but it will just begin after that. You will also have to take care of the house bills that come with buying a house and of course, the monthly mortgage payments along with maintaining a good lifestyle would have their own places. Decide how much you can actually afford to pay as a down payment while maintaining a sustainable lifestyle in the future.
2. The Impact of Down Payment on Your House Deal
The down payment amount that you choose to pay is also going to determine how financially stable you are to the mortgage lender. If you are going to pay a considerable amount as the down payment then the chances of getting the rest of the amount approved in a mortgage are high and this, especially if you get pre-approved for a mortgage, is going to send a positive signal to the seller. It will remove some competition in buying a house and can help you get a better deal.
In most cases, sellers are likely to sell a house to an individual having financial stability in order to avoid discrepancies or uncertainties.
3. Loan to Value Ratio (LTV)
In simple words, the loan to value ratio is the amount that comes when you divide the loan amount by the market value of the house. The loan amount would be higher if you pay less in down payment. On the contrary, if you are paying a larger down payment on a house, the loan amount would be less and that would reduce LTV. A lower LTV indicates that you are a credit positive borrower and thus the interest rate that you will pay on your mortgage would be less. You can also avoid extra costs with a lower LTV ratio.
4 Choose Benefits Programs of Lower Down Payment
House prices in Canada are increasing and it is not uncommon that people may not have enough savings to cover a 20 percent down payment to buy a house. In such cases opting for various programs offered by the Canadian government can come to your rescue.
There are few programs that you should consider for the same listed below.
- Home Buyer’s Plan (HBP)
- First Time Home Buyer Incentives
- Home Buyer’s GST/HST Rebates
- Rebate on Land Transfer Taxes
This will help you to pay a larger amount in down payment and save you on the additional cost in the future.
How Can You Save for a Higher Amount of Down Payment?
Saving for a down payment is not that hard but it requires rigorous discipline to make sure that you achieve the target. We have listed a few ways in which you can save for a down payment on a house.
If buying a house is your dream then you have to let go of the unnecessary spending like going out on vacations, entertainment, movies, etc. If you spend less you will be able to save more and achieve your target early. list your expenses under two categories “wants” and “needs” and try that you do not spend more than you should.
Save Money for Buying a House Early and Separately
You might have a savings account or may have saved for an emergency but it is equally important that you dedicate a specific account to save for a house. You should start an automatic payment to deduct a certain amount from your savings account every month or every quarter as per your preference that goes to your house buying fund. This will make sure that you do not have any excuses to avoid saving and it will keep you on track.
Do Side Hustles
Now this does not mean that you have to work very rigorously but you can find ways in which you can increase your income. It can include writing articles, selling your photographs on platforms like Shutterstock, teaching a language or course online, etc. In short, do things that can create new income and you can contribute more towards your dream of buying a house.
Focus and Paying Off Your Debt
This is the last point that I would like you to focus on. When you go to buy a house you will have to take a mortgage loan and your credit condition would reflect at that time. If you have bad credit, you may find it hard to get a loan and if you have a poor credit score it means that you will have to pay a higher interest rate. So plan such things in advance and start paying off the debt with a higher interest rate first and try to reduce it gradually.
The Last Thought
Buying a house is not just a dream but a lifelong commitment. You have to plan in advance, keep walking on it, and build it in your mind before you actually build it. Keep your goal in mind whenever you think of spending an extra penny by going out or want to buy something you don’t need. All the best!