Everything You Need To Know About Downpayments in Oakville
If you are interested in buying property in Oakville, you may have concerns about downpayments in Oakville. Whether you call a real estate agent or contact your bank about a mortgage, one of the first questions you will be asked is how much you can afford for a downpayment and how much you can afford for a home.
What Is A Downpayment?
A downpayment is the money you pay upfront when buying a house. You will pay your downpayment when you finalize the purchase of the property and this amount will be subtracted from the amount you will need to pay for your mortgage.
Let’s say, for example, that you purchase an Oakville house for $900 000. If you have a downpayment of 10% or $90 000, this is the money you will pay upfront. You will then have a mortgage amount of $810 000 (not including interest).
A downpayment is calculated not only as an actual dollar amount but also a percentage of the property price. The amount is calculated as a percentage of the purchase price or appraisal price (whichever is lower).
Why Do I Need a Downpayment?
A downpayment is important for several things:
- It shows banks and lenders that you have enough money to start the house purchasing process. If you cannot come up with money for a downpayment, you will generally have a hard time securing a mortgage.
- It gives you some equity. Equity is the amount of value in your home that is not encumbered by a mortgage. Your equity is important if you need to get additional financing after your home purchase for renovations or anything else.
- It can determine how much you will need to pay overall. A larger downpayment will mean less interest and a smaller monthly principal.
How Much Money Do I Need for Downpayments in Oakville?
The magic number for downpayments in Oakville is 5%. In most cases, this is the minimum percentage of the purchase price you will need to get a high-ratio mortgage and buy a property. The other magic number is 20%. This is the amount of downpayment you will need to get a conventional mortgage.
If you cannot come up with a downpayment of 20%, you will face extra restrictions with a high-ratio mortgage:
- You will need mortgage insurance
- You must be purchasing a home you will live in (and not an investment property)
- The property must be less than $1 million in value
- You must show that you can pay closing costs of at least 1.5%
- You must show that you have reasonable levels of debt
- You must have the downpayment 15 days before you make an offer on the house if you are getting your downpayment as a gift from a family member
- Your mortgage amortization period must be a maximum of 25 years
One of the most important differences between high-ratio mortgages and conventional mortgages is that if your downpayment is less than 20% of your home’s purchase or appraisal price, you will need mortgage insurance from Genworth Financial Canada, Canada Mortgage and Housing Corporation (CMHC), or Canada Guaranty since the loan is considered a bigger risk for the lender.
Mortgage insurance is an extra expense and you can pay it either all at once when you buy a property or monthly (if it is added to your mortgage). If you cannot afford to pay the mortgage insurance in one lump sum, you will end up paying interest on the monthly amount you pay.
Your mortgage insurance is based on the amount of your downpayment and on the size of your mortgage. The insurance is typically between 0.5% and 2.75% of your mortgage amount. In addition to the insurance, you will pay higher interest rates if your downpayment is under 20%, so it does pay to put down more on a house.
Even though 5% is the bare minimum for a house purchase, many lenders will want to see downpayments of at least 10%. You may want to speak with a mortgage officer at your bank to find out exactly how much money you need. A mortgage specialist can review your specific situation and even offer financial tools that can help you.
Where Can I Find The Money for Downpayments in Oakville?
Now that you know how much you need, how can you come up with the cash? You have several options:
- Savings. It can be a long process to save up 5-20% of a home price, but saving more means that your equity in the house will be higher.
- Your RRSP. If you are a first-time homebuyer, you can borrow up to $25,000 for a downpayment through the RRSP Home Buyers Plan (HBP). You will then need to make 15 yearly repayments, starting two years after you have taken out the loan. If you pay on time, you will not need to pay income taxes on the loan.
- A gift from a family member. If you are a young homebuyer and have a relative – such as a parent, sibling, or grandparent – willing to give you the money for a downpayment, you will need a letter from the family member to your lender, stating that the downpayment does not need to be repaid.
- Loans. You may also be able to get some or all of a downpayment through credit cards, lines of credit, personal loans, and other sources. Keep in mind, though, that if a lender sees that you have lots of debt, this can affect your approval chances and your rates.
- Other property. If you have other real estate, you may be able to use equity from that property as a downpayment for your new purchase.
- Cash-back mortgages. Offered by banks, these mortgages return a percentage of the mortgage amount back to you as a loan. They can, however, be an expensive way to enjoy a smaller downpayment.
Since the average residential house price in Oakville in March 2014 was $842,748 and had risen when compared from the average $780,592 a year before, many homeowners find they need multiple sources for downpayments in Oakville. For example, you may need to rely on help from family, savings, and also some form of borrowing.
What is the Best Way to Secure Downpayments in Oakville?
The best way to pay for your downpayment, of course, is either through savings or a gift. There are several reasons why it makes sense to buy a property now, even if you have to borrow:
- You only have so many working years left before retirement and waiting will mean taking your mortgage into your retirement years
- You find the ideal property for you at the right price
- You have the financial resources or good job to pay for the borrowed amount and the home
- You have good credit and you want to take advantage of the strong Oakville market
If you do decide to borrow, borrowing against your RRSP is a good option. Since an RRSP is an investment that can earn money at a faster rate than your savings account and since many employers match your RRSP contributions, your RRSP can grow quite quickly compared to other savings. In fact, some first time homebuyers max out their RRSP contributions so that they can save up for a home purchase.
There are a few drawbacks with the HBP, however:
- You will need to budget for the yearly repayment and this payment will be in addition to property taxes, your mortgage, and the many other costs of owning a home
- If you pay less than the yearly repayment amount, you will be paying income taxes on the amount not repaid
- If you withdraw the money from your RRSP, that money will not be growing for your retirement
If you are considering borrowing money from other sources, keep in mind that this can affect your ability to secure a mortgage. When evaluating your eligibility, your lender will consider your Gross Debt Service (GDS) ratio, or the percentage of your monthly housing costs related to your gross monthly income.
If you can only secure 5-19% as a downpayment, a high-ratio mortgage will require you to show that your mortgage interest and principal in addition to heating and property taxes do not take up more than 39% of your gross household earnings. Your total amounts of debts must also not be more than 44 per cent of your monthly household earnings.
Essentially, securing downpayments in Oakville and mortgages to buy homes is a careful balance between debts, savings, and what you can afford.