Every day, you check real estate listings online. On the weekends, you drive through neighbourhoods seeking out For Sale signs. So, it may be safe to say, you’re on the fast track to purchasing your first home. You’re not alone: In 2013, 57% of new homes were purchased by first time buyers*. But are you financially prepared for potentially the largest purchase you’ll ever make? Do you have enough money for the down payment and for the monthly household costs that will follow for many years?
Good questions – and ones that Canadian home buyers plan to approach in a variety of ways. Thirty percent of buyers plan to have at least a 20% down payment**. The minimum down payment in Canada is 5% with the average down payment ranging from 5%-20% of the home price.
A down payment of less than 20% (called a high ratio mortgage) requires mandatory mortgage default insurance offered through a provider such as Canada Mortgage and Housing Corporation (CMHC), Genworth Canada, or Canada Guaranty that protects the lenders in case of borrower default. The premiums are calculated as a percentage of your mortgage amount and are paid off over the life of your loan. By applying a higher down payment, the default insurance premium will be lower. (Note: Home prices over $1 million require a minimum 20% down payment.)
The amount of your down payment affects:
- The home price you can afford.
- The size of your mortgage and monthly payment amount.
- The amount of mortgage default insurance you’ll pay.
The sources for your down payment can be:
- Saving a fixed amount from each paycheque, selling investments or personal property, or borrowing from family or friends.
- The Home Buyer’s Plan (HBP) that allows you to withdraw up to $25,000 from assets held within your RRSP ($50,000 per couple, assuming they meet the criteria) for a down payment without any immediate tax consequences. The withdrawal is repayable in equal installments over a 15 year period to avoid income inclusion.
- A Tax-Free Savings Account (TFSA) allows you to make withdrawals at any time for any purpose. There are no restrictions on the amount withdrawn or obligation to repay, unlike the HBP, and you won’t encounter related tax issues down the road.
Buying your first home and figuring out how to pay for it isn’t as easy as it might seem – and your choices will stay with you for many, many years. Your professional advisor can help you make the right choices for you.
*Canadian Association of Mortgage Professionals (CAAMP) www.caamp.org/press- releases.php?pid=31&article=761
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.