Most home buyers know that they can buy a house with as little as five per cent down, but what they may not know is how much extra this will cost them in the short term and in the long run. If your down payment is less than 20 per cent, your mortgage is considered "high ratio," and you are required by the Canadian Mortgage and Housing Corporation (CHMC) to purchase mortgage insurance, which protects the lender against mortgage default. With its investment protected, the lender is then willing to offer buyers with small down payments interest rates comparable to those offered to buyers with bigger down payments.
If you can make a down payment of at least 20 per cent, that is ideal, because then you have no obligation to purchase CMHC insurance. This can result in significant savings over time. However, even if you cannot reach the 20 per cent mark, it is always better to make as big of a down payment as you possibly can, for two reasons:
1) The long-term cost:
The smaller your down payment, the higher your mortgage insurance premium will be. This can add up to several thousands of dollars, which, when added to your mortgage, will result in a fair amount of extra interest over the 25 to 30 years of your mortgage. For example, let's say you're buying a home worth $200,000 with five per cent down ($10,000). Some buyers might think they are therefore borrowing $190,000 from their lender. However, the lender is really lending you another $5,000 (roughly) to pay for the CMHC insurance plus eight per cent PST (roughly $400) This means you're actually borrowing approximately $195,000, reducing your actual down payment to around $5,000 or two per cent. Thus a small down payment of five per cent can shrink to a minuscule down payment of two per cent, resulting in a lot of extra interest over time.
2) The short-term costs:
The higher the cost of your mortgage insurance, the more PST you will pay, and, while the insurance premium can be borrowed from your lender and paid back over time, along with your mortgage, the PST on your CMHC insurance is payable on the date of closing. However, unlike your other closing costs (which you pay to my office by bank draft), no action is required by you, as this tax is paid to the government on your behalf by your lender and then deducted from your mortgage amount before it is released to me. Typically, most buyers end up paying somewhere in the range of $400 to $800 in PST on their mortgage insurance. If you'd like to know the exact amount of your CMHC insurance and the PST, please contact your mortgage specialist.
I hope this has shed some light on an important issue. In the end, no matter what size your down payment, our dedication to you remains the same!
Mark F. Graham
Mark F. Graham
Barrister, Solicitor, Public Notary
Mark Graham Law Office Professional Corporation