The amount or percentage you put as a down payment in relation to the total value of the property will determine the main rules under which financial institutions will qualify you. This will be the topic of this podcast.
To buy a home in Canada, a minimum down payment of 5 percent is required. This is the general rule to buy your first home, that is, the financial institution can loan you up to 95% of the value of the house. So, the general rule is very favorable for the first buyers, because their initial investment is very low, and the interest rate for the price that is charged for the loan or the use of the money of the credit institution, is also very low.
This rule applies to all first buyers, as long as the parameters and criteria regarding good credit history and repayment of debts are fulfilled by each buyer. These parameters and criteria are what we will talk about in these Mortgages Talks podcasts so that you have the necessary information for being considered an eligible borrower by financial institutions so that you can contract a loan in the best conditions available at the time you decide to start the purchase process.
It is worth making two annotations in the margin of this information because we will see them in other podcasts.
The first is that all credits are subject to an interest rate, this rate represents the value charged by Financial Institutions for giving the loan. Market rates range between 1.9% and 3.5%. These rates are subject to the daily movements of the economy and the strength and risk that each case presents.
The Second annotation is that just as there is a rule for buying the First House, there are also specific rules for the different types of mortgages, such as the for purchase of a second home or vacation or investment property, or for commercial purposes, or for obtaining a credit to consolidate debts as a line of credit guaranteed with the value of your property. Little by little, we will be putting together this financial-real estate strategy puzzle.
Going back to the general rule to buy the First Home, we said that the down payment can be 5 percent of the purchase value, for example, to buy a house of $ 400,000, a down payment of $ 20,000 is needed. But what if the house you want is more than 500,000? Good question because the rules change.
Now, for any house of more than 500,000 but less than 1,000,000, you will need 5% on the first 500,000, which will always be 25,000, and then you will need 10% for any amount that exceeds that amount.
So if your house price is 600,000, you will need your 25,000 + 10% of the additional 100,000, which is 10,000, which means you will have to save up to 35,000 for your down payment.
Let's take another example, if the purchase price is 750,000, you will need the standard 25,000 for the first 500,000, then you will need another 25,000, or 10% of 250,000, so you will need a total down payment of 50,000 to buy that 750,000 house.
If your purchase price is $ 1 million or more, a 20% down payment is required. These minimum down payment amounts are rules of the Government of Canada that are designed to maintain a good stable housing market and avoid financial collapse.
As well as this parameter, there is another important requirement of the Government. If the down payment is between 5% and 20%, it is also a rule that you have a high risk or high ratio mortgage insurance.
The premium of this insurance is almost always added to the amount of your mortgage. This insurance is there to protect the Financial Institution or lender from non-payment of the borrowers since the loan is 80% or higher.
Let's look at an example: if the purchase price is $ 400,000 and you have a 5% down payment, your mortgage amount is $ 380,000, the mortgage insurance premium will be 4% or $ 15,200, which is then added to your mortgage, which raises the total amount of your mortgage to $ 395,200.
The insurance premium decreases as more money is offered for the initial payment or down payment, and so, it also decreases if it is offered 10% or 15%, instead of 5%. If the down payment offered is more than 20% of the purchase price, then there is no premium insurance because there is a lot of equity in the house as a buffer, that is, it falls outside the high ratio. The reason is that if something goes wrong with the repayment or with the mortgage payment obligations, the financial institution already has an insured amount of the money lent, so a good strategy to reduce the monthly payment of a mortgage, is to collect a 20% down payment.
It is true that most first-time homebuyers today are buying their homes with the minimum down payment required. Therefore, it is important to resort to savings strategies and to know what Canada's own financial system offers that can support me to reach this goal of 20% for my down payment.
With all this, we can see that the most important thing is to give ourselves time to design and build our file well in advance so that when the time comes to present our request, we can take advantage of the benefits made available by the Government, and have greater financial strength at the moment of offering that initial payment that allows us to access better credit conditions.
Therefore, after all of this said, you must ask yourself: how much can you save or how much are you willing to offer to buy your first home?
In the next episode, we will talk about saving strategies for that down payment.
These are the episodes of "ABC of Mortgage in Canada by Mortgages Talks".
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