Buying your first home is an exciting time. Your brain is racing with a million questions. Your friends and family are all adding their two-cents, and your research online is coming up less than helpful because you can only look up the questions you know to research. What about the stuff you don’t know you need to know? Don’t worry, I’ve got you covered!
Let’s dive in to down payment and this CMHC thing everyone keeps talking about but can’t really explain.
CMHC, what is that again?
CMHC stands for the Canadian Mortgage and Housing Corporation. It’s a government agency that’s mandated is to help keep our housing market stable and affordable. They also research housing trends in Canada and provide their research to both consumers and government policymakers.
Ok great, but how does CMHC impact my mortgage?
Where CMHC will impact most first time home buyers is related to their down payment. Anyone with less than a 20% down payment will be subject to a default insurance premium. This premium is included in your mortgage and is intended to protect the bank and financial systems should you default on your mortgage. There are actually 3 default insurers, CMHC is just the most commonly named. There other two are Canada Guaranty and Genworth Canada.
So, how much do I have to put for my down payment?
The minimum is 5% of the purchase price, unless you’re buying a home for over $500,000.00. In that case, you’ll need 5% down on the first $499,999.00 and 10% on every dollar their after.
Is this my only chance to ever buy a home with just 5%?
No, it’s not. Under current regulations, as long as you are buying a principal residence (meaning you are buying it for yourself to live in), you can put as little as 5% down. Now, as always, there are some caveats with this. You can only have so many default insured mortgages. This is partly to stop mortgage fraud so not every house is purchased as a principal residence when it’s meant to be a rental. But that’s a topic for another day.
Take away – if you buy a house now for yourself to live in and 3-5 years down the road you sell and buy a new one, you can put 5% down again (as long as the rules don’t change by then).
Should I only put 5% down?
No! If you have the means to put more, please, by all means, put more down. Default insurance premiums work on a sliding scale. What this means is:
- 5% – 9.99% down payment = Your default insurance premium is 4%
- 10% – 14.99% down payment = Your default insurance premium is 3.10%
- 15% – 19.99% down payment = Your default insurance premium is 2.80%
Try your best to meet those thresholds for change in premiums, 5% 10%, 15% and 20%. You’ll see significant savings on that default insurance premiums if you can reach that next tier.
Most importantly, work with someone who is happy to answer your questions and is answering them, and the ones you forget to ask. A licensed professional is one of the best tools you have in your toolbox when house shopping!