Get the low-down on down payments

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What to know about planning and saving

By Brandon Scott for The Edmonton Journal

With the average year-to-date price of a home in Edmonton sitting at about $366,000, coming up with a generous down payment can be a challenge for first-time buyers in this city.

And with both provincial and national prices up four to five per cent on a year-over-year basis, it’s a good time for interested buyers to seek answers to some of the most important questions that arise when planning for the purchase of their first home.

Q: What’s the minimum required down payment?

A: In Canada you can purchase your first home with as little as five per cent down. While there are still a few lenders offering what’s commonly referred to as “no down” financing, the qualifying process is much more stringent and the borrower usually ends up paying more interest in the long run. To obtain the best financing rates available, a buyer should be prepared to put down a minimum of five per cent of the purchase price. Of course, choosing to put down more than the minimum will lower your payments and allow additional savings on interest, too.

Q: What’s a better minimum amount for a first-time buyer to aim for, and why?

A: A down payment of anything less than twenty per cent of the purchase price will require the borrower to have mortgage insurance by a third party, such as the Canada Mortgage and Housing Corp. (CMHC), Genworth Financial Canada or Canada Guaranty. Since most people choose to add the cost of the insurance premium into their mortgage rather than paying the premium out of pocket, let’s compare two scenarios based on a five-year term with an interest rate of 2.99 per cent, to see the true cost.

Example A: If the purchase price is $360,000 and you make the minimum down payment of five per cent ($18,000), the mortgage insurance premium is $10,773. This gives you a total mortgage amount of $352,773. Based on the maximum amortization of 25 years, your monthly payment will be $1,667.68.

Example B: If the purchase price is $360,000 and you make a 10-per-cent down payment ($36,000), the mortgage insurance premium will be $7,776, giving you a total mortgage amount of $331,776. Based on the same amortization of 25 years, your monthly payment will be $1,568.42.

Your most important take-away from this? The buyer in Example B lowers the balance owing on their mortgage by $3053.57, pays $2902.23 less in interest, and $2957 less for their insurance premium. This means they saved a total of $8952.60 over the five-year term simply by putting down an additional five per cent.

Q: What’s your first step in saving for a down payment?

A: Some first-time homebuyers are fortunate to be able to use inheritance or a gift from a family member as a down payment. But for many, the only sure way to prepare is through good, old-fashioned saving. An automatic withdrawal with your bank each pay period can easily have a certain amount of funds transferred to a separate account. You can also commit to setting aside any bonuses, tax refunds, or other unexpected income until you have enough to purchase your first home.

Q: How can you take advantage of your RRSP(s) to buy a first home?

A: The Home Buyers’ Plan is a federal government program that allows eligible individuals to withdraw up to $25,000 tax free from their Registered Retirement Savings Plan (RRSP) to use toward the down payment when purchasing a home (certain conditions apply). For accessibility and details about the withdrawal process it’s best to contact the financial institution holding the RRSPs.

Q: What are some important best practices to follow if you do use your RRSP(s)?

A: Things are rarely free, and your tax-free withdrawal is no different. You’ll have to make instalment payments back to your RRSPs within 15 years, otherwise any amount not repaid will be added and taxed as income.

Q: What tips do you have for saving/amassing a down payment if you don’t have an RRSP?

A: The goal for anyone saving for a home should be to spend less than they earn and remember it’s not how much you make, but what you keep that matters.

Q: What’s a reasonable time period for a first-time buyer to save for a down payment?

A: This will vary depending on a variety of factors including their income, existing obligations, and price of the home they wish to purchase. Whether it takes a few months or three years, stay within your savings budget and do not let the timeline allow you to become discouraged. You can do it.

Q: If you don’t have an RRSP or savings and you tap the bank of mom and dad, what important things do you recommend doing?

A: If you are fortunate enough to have a parent or other relative able and willing to assist you with the down payment, know that the money being received from them has to be a genuine gift — the bank or lender will want a letter from the donor confirming it does not have to be repaid.

Q: Which experts should you consult as you embark on saving a down payment and what should you ask them?

A: There are many great people that are capable of helping first-time home buyers review proven strategies to assist with saving for a down payment. These professionals include bankers, mortgage brokers, financial planners, debt counsellors and accountants.

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