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Buying a house in Ontario: down payment

by Helana Mulder on 31 Jan 2022

The well-known myth of the American dream is owning a house is the suburbs with your white picket fence. Nowadays, homeownership can feel like a faraway dream for many young people.

The real estate market in Ontario (or even just across Canada) has seen a significant boom in sales prices over the last couple of years, mainly due to the COVID-19 pandemic. House hunting became less about finding what you loved and more about finding what you could afford. With these home prices increasing, so do the down payment costs.

Understanding your options and steps for making a down payment in Ontario is essential to the home buying process and can help you set yourself up financially.

What is a down payment?

When you buy a house, one of the first things you do, after you've signed all the papers and the seller has accepted your offer, is you pay a down payment. A down payment is a portion of the money that goes towards paying off the entire purchase price of the home. The rest of the principal amount, as well as interest costs, makes up the mortgage.

What is the minimum down payment requirement?

In Ontario, there isn't really a required minimum down payment amount. Rather, the minimum down payment depends on the home purchase price. The standard goes as follows:

  • $500,000 home requires at least 5% down.
  • Homes over $500,000 require 5% on the first $500,000 and 10% on the rest of the amount.
  • Houses that go for more than $1 million will not be eligible for mortgage loan insurance.

That being said, it's important to understand that if you make a larger down payment upfront, you will have a smaller mortgage which can lead to less interest incurred.

Another important item of note is that if you do not pay at least 20% of the sale price of the home as your down payment, you must also purchase mortgage default insurance - also called mortgage loan insurance.

Where do I get the money for a down payment?

If you've been planning on buying a house for some time, you probably have a good chunk of cash set aside for a down payment. Also, buyers can use up to $35,000 (or $70,000 for a couple) of their Registered Retirement Savings Plan (RRSP) funds to go towards the down payment, or, you can be gifted a down payment from a family member.

What is mortgage default insurance?

When banks and other loaning agencies let you borrow money, there are associated risks that they are taking. These associated risks are why credit scores, proof of income, and other verifications are so important when it comes to borrowing money. If an individual has a poor credit history, it will be harder for them to find reliable financial institutions that will lend them money for a down payment.

A safety net

A mortgage is easily one of the biggest loans you will ever take out. Banks and most lenders are relying on homeowners to make their monthly mortgage payments and interest in a timely manner. If you are not a responsible spender and do not pay your mortgage on time, there can be a lot of problems both for you and the banks. The 2008 financial crisis stemmed from individuals defaulting on their mortgages as they were unable to make their monthly payments.

Mortgage loan insurance acts as a sort of safety net for banks and loan agencies in case the borrower defaults on their payments. If you cannot afford to put down 20% on your home or have a poor credit score, you're considered a riskier borrower and the institutions lending you the money will want to ensure that they will get their money back by having you purchase a mortgage loan insurance. This insurance premium protects the mortgage lender - not the borrower.

Canada Mortgage and Housing Corporation

One of the most reliable and well-known mortgage insurance providers is the Canada Mortgage and Housing Corporation (CMHC). The CMHC insurance premium ensures a reasonable interest rate in order to work towards stabilizing the Canadian housing market.

To avoid other costs associated with mortgage loan insurance, it's recommended that a down payment of 20% or more is a good rule of thumb. As well, understanding your options or requirements can help you find mortgage rates that fit within your budget.

What is the average purchase price of a home in Ontario?

The Canadian housing market boom saw home buyers offering way over the asking price of a home as the market was extremely hot and competitive. In the summer of 2021, the average home price in Canada was over $650,000. In Ontario, those numbers will continue to rise with the average home purchase price spiking to over $850,000 in 2022.

An important thing to note here is that, as house prices continue to rise, there will be more homebuyers who will not be eligible for mortgage loan insurance. Finding a home for under $1 million is soon going to be harder than finding a home for under a million.

What is the average price of a down payment?

Down payment requirements, as we've seen, depending on the cost of the house. A 20% down payment can vary dramatically depending on the price of the home. For example, the payment requirements on a house located in a small farming town will likely be considerably smaller than the down payment on a house in Toronto or other big cities.

In 2021, it was reported that the average buyer put 20-22% down on their home, and the average down payment price was just over $140,000.

Other costs associated with buying a home

Signing the deal and setting the closing date on a home can be an incredible feeling - especially if you're heading to your dream home. While buying a home is a great achievement and can be an important step in your financial or personal goals, there are some associated costs that you need to consider.

After you've paid a large down payment amount in a lump sum, you may think you're done for a while. This is not the case. Closing costs can take quite a chunk out of your wallet depending on where you're buying. On average, these costs can add up from 3-6% for the home's purchase price.

Closing costs

These costs can include things like provincial sales tax, home inspection fees, commission or payment for a real estate agent, legal fees, closing fee, homeowner's insurance, and property tax. While these fees depend on the type of home you purchase and where you buy it, you should consult a real estate agent in order to understand what other costs you will have to manage.

Managing your mortgage

Your mortgage amount is the remaining balance on the home after your down payment and any interest incurred over the period of time it takes to pay off the mortgage. Mortgages can seem like an intimidating concept - a huge 20-30 year loan that never seems to go away. However, a good home buyer's plan and solid budget can help you manage your mortgage.

Use a financial planner

One of the most important steps you can take to managing your mortgage and other expenses related to buying a home is talking to a certified financial planner. These professionals can help you determine what mortgage rate fits within your budget and goals, manage interest costs, and use mortgage calculators to help you understand what kind of payments are required from you. A financial planner can also set up a plan that still leaves a solid emergency fund available.

Shared equity mortgage

If you are a first-time homebuyer, you may be eligible for a shared equity mortgage which is when the government offers interest-free financing. This type of mortgage can cut your monthly mortgage payments without affecting your down payment costs.

Take advantage of interest rates

Looking at interest rates and forecasting the future can help you keep associated costs low. When rates are low, a fixed-term mortgage might be the best decision. On the other hand, if rates are high but are forecasted to go down, a variable interest rate might benefit you. Whatever you decide, you should consult a professional to talk through your options.

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