How Much You Should Save For A Down Payment | Fivewalls

Fivewalls: How Much You Should Save For A Down Payment On A House

Buyers, Tips & Advice
Last Updated: Apr 03, 2020

Putting a down payment on a house can be such a wonderful experience. But it can also be stressful, especially if you do not know how much to budget for. 

In 2016, you used to be able to put a 5% down payment down on a home under $1 million. Now you can only put a 5% payment down if the house you are buying is less than $500,000. If the home is more than $500,000, you will pay 5% on the first $500,000, and 10% on the remaining amount.
 

Examples:
 

Price Of Home

Down Payment Amount

Total

$350,000

$17,500

$17,500

$450,000

$22,500

$22,500

$550,000

$25,000 + 10% of remaining 5,000

$30,000

$850,000

$25,000 + 10% of remaining $350,000 

$60,000

$1,000,000

$200,000

$200,000

$2,500,000

$500,000

$500,000

 

After budgeting for your down payment, remember you will also have additional costs such as closing costs, a home inspector, etc.

Closing costs will vary in each case depending on the type of property you are buying or the loans you have. Typically, it will range anywhere from 2-5% of the purchase price.

Your real estate agent will make sure you understand all the closing costs involved of course, but some of these will be included:

  • Appraisal
  • Attorney Fees
  • Homeowners’ Insurance
  • Property Tax
  • Recording Fees
  • Transfer Taxes
  • and more 

 

Price Of Home

2-5% Of Closing Costs

Total (+ down payment)

$350,000

$7,000 -$17,500

$24,000- $35,000

$450,000

$9,000 - $22,500

$31,500 - $45,000

$550,000

$11,000 - $27,500 

$41,000 - $55,000

$850,000

$17,000 - $42,500 

$77,000 - $102,500

$1,000,000

$20,000 - $50,000

$220,000 - $250,000

$2,500,000

$50,000 - $125,000

$550,000 - $625,000

Remember these are just estimates are not all closing costs apply to every transaction. 
 

How Does A No Down Payment Mortgage Work?

Do not let the “no down payment” part fool you. There is still money involved that is being put down in order for you to purchase your house, it is just not your personal savings.  It works the same way as borrowing for a mortgage, where you are making monthly payments on top of an interest charge, only you are now also borrowing to put a payment down on your house. So now you owe more than just the mortgage loan and could potentially be putting yourself at a higher risk of debt.

The Pros & Cons To A No Down Payment Mortgage

If you are in a situation where you feel like a private mortgage is your only option, make sure you do your research beforehand. Do not rush into something you do not understand. Write down the pros and cons and any questions you have, to consider what is right for you and your financial situation.
 

Pros:

  • You are putting less money down and have more cash on hand for other expenses
  • You can buy and move in more quickly
  • May be able to improve credit score
  • Stop paying rent and start building equity
  • Improve relationship and trust with family member
     

Cons:

  • Do not have home equity right away
  • Interest charge and mortgage payments are higher
  • Smaller down payment means longer amortization period
  • Having multiple loans can decrease the amount of mortgage loan you are approved for
  • Still have to pay other costs (closing costs, legal fees, etc.)

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How Do I Pay For The Down Payment?

There are different options for people when they do not have the cash up-front. A line of credit is a great way for first-time buyers and young adults to build a credit score. Personal loans can also be made from the bank or a family member.

Sometimes homebuyers will put down more money for their down payment than the suggested percentage. The higher the amount you put down, the lower your mortgage payments will be. Over the long-run, you may be spending more than you planned with the added insurance and interest costs if your down payment is lower.

Always know your budget and play within it. Build a budget chart before putting that payment down on a house so you know what you will be spending each month on your mortgage and what is left over for other costs.  

 

Ways To Borrow For A Down Payment

mortgage loan, borrowing down payment, buying a house in Toronto, fist-time buyersIn Canada, if you need to borrow for a down payment, as well as your mortgage, you cannot borrow from the same lender. You will need to borrow from a different lender and can do so in form of a personal loan, a line of credit, or charge it to your credit card. Charging it to your credit card is not wise, as it could potentially put you in debt and decrease your credit score that may already be poor.

The most popular choice is a line of credit, which you will pay back over time including an interest charge. The interest charge and your mortgage payments will be higher since you will be considered a high-risk borrower.

Borrowing from a family member is another option if they are willing to help you out. It is best to have written and signed copies of things to fall back on should a problem arise. In 2016, 35% of homebuyers received help with their down payment.

 

Using Your Registered Retirement Savings Plan Account (RRSP)

If you are a first-time home buyer, the government will let you take cash out of your RRSP account, up to $25,000, as long as it is paid back within the next 15 years. If you are buying with your partner and they are also a first-time buyer, they can take out $25,000 as well and you can potentially have a total of $50,000. You are both considered a first-time buyer if you have not owned a home within the last four years prior to your withdrawal.
 

Pros:

  • $50,000 can be a large 20% down payment, meaning you will have shorter amortization period and lower mortgage payments
  • Can be a quick way to get down payment
  • Increases your equity right away, especially if down payment is 20%
  • Withdrawing money can be tax deductible and you can use money you receive back to pay back RRSP accountmortgage loan, borrowing down payment, buying a home in Toronto
  • Can set up payments as often as you like (monthly, bi-weekly, etc.)
     

Cons:

  • Added payment on top of mortgage
  • Miss years of building interest on your account
  • Come retirement time, there may be less money now
  • If you miss a payment, the unpaid amount will be fully taxed as income
     

Technically, you are still putting a down payment on your home. Zero down payment does not mean you are not paying anything, it just means you are borrowing the money on top of your mortgage.

Whether you are taking out a loan, borrowing from a family member, or using your RRSP, make sure you weigh the pros and cons for each situation.

 

Got more downpayment questions? Consult a vetted real estate agent for free today!

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