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What’s in a down payment?
By Riki Unrai
You want to buy a home or have already put an offer in on one. Now comes the big question… How much is this going to cost me upfront? Well you’re in luck because you’re about to enter the crash course on down payments. Are you buckled in? Good. Let’s go.
Source
There are two types of down payments. The first one is called a traditional down payment. This is what most lenders prefer and includes personal savings, RRSP withdrawal, funds borrowed against assets, 50% sweat equity, proceeds from the sale of another property, unencumbered land, gift from immediate relative or an equity grant.
The second is called a non-traditional down payment. This applies when the borrower has good credit but has not accumulated enough for the traditional five per cent down payment. It includes loans, lender cash back incentives, gifts or grants from an arm’s length third party or 100% sweat equity.
How much you need
As mentioned above, the minimum down payment is five per cent of the sale price. Keep in mind that when you put down less than 20% you will have to pay mortgage insurance premiums. The amount varies from 1.25% to 3.85% of the sales price depending on how much you put down and where that down payment is coming from. This amount is added into your mortgage so it is not an upfront cost.
What the insurance is for?
When you put down less than 20% your mortgage is considered a high-ratio transaction. Simply put, it means that the lender is taking on more risk by funding you as you have less ‘skin in the game’ so to speak. The insurance allows them to recoup their losses in case you default on your mortgage loan and walk away. So to be clear this insurance covers the lender…not you. But you still have to pay for it.
You may think that this is unfair but you also need to keep in mind that this system was put into place for a reason. It played a big part in why our economy did not collapse after the 2008 financial crisis like the USA did. Like it or not, it’s here to stay.
If you have any questions about your down payment be sure to contact your local Mortgage Broker who will be able to give you the complete skinny on what you need to know.
– Riki Unrau is a Mortgage Broker with CENTUM Homeward Mortgage Group Ltd.
