When buying their first home, most people will need a loan from a bank. A first-time home buyer loan, called a mortgage, is gradually paid off over a number of years.
Types of Mortgage: Variable or Fixed Rates
When you apply for a mortgage, you have the choice of getting either a fixed or variable interest rate. The most popular kind of mortgage is a five-year fixed rate mortgage, which means your rate is set for the first five years of your loan.
As the name implies, fixed-rate mortgages are constant for the duration of the term. There are also variable-rate mortgages, which fluctuate with the bank’s prime rate. The advantage of a fixed-rate mortgage is that your mortgage payments won’t change your rate won’t increase even if the prime rate increases. Because of this, the interest rate on fixed-rate mortgages tends to be higher than variable-rate mortgages. With a variable-rate mortgage, your interest rate will decline if the bank’s prime rate falls. However, if the prime rate increases, so will the interest rate on your mortgage.
DOWN PAYMENT RULES
A down payment refers to the money a purchaser must pay upfront when buying a home. Typically, the down payment is a much smaller amount compared to the size of the mortgage. Together, the down payment plus the mortgage represents the total value of the home being acquired. Down payments are usually expressed as a percentage of the property value. For example, a 15% down payment on a home selling for $500,000 would be $75,000. The mortgage, comprising the balance, would be 85% or $425,000.
In Canada there are minimum down payments for all property purchases. The percentage you must put down depends on the purchase price of the home:
For homes less than $500,000, the minimum down payment is 5%
For homes selling for between $500,000 and $1 million, the minimum down payment is 5% of the first $500,000 of the purchase price and then 10% of the purchase price between $500,000 and $1 million
For homes with a purchase price of greater than $1 million, the minimum down payment is 20%
The size of your down payment affects the size of your mortgage and whether or not you need CMHC insurance.
CMHC Insurance (Mortgage Default Insurance)
In Canada, any purchaser who has a down payment of less than 20% is required to purchase mortgage default insurance, which is also known as CMHC insurance. This protects your lender in the event that you end up defaulting on your mortgage.
The amount you pay goes down as your down payment increases. For down payments of 5% to 9.99%, homebuyers pay a premium rate of 4.0%. If you have a down payment of 10% to 14.99%, the CMHC insurance is 3.10% of the mortgage amount. And for down payments of 15% to 19.99%, the CMHC insurance is 2.80%.
CMHC insurance isn’t needed if your down payment is 20% or greater, and it’s not available on homes that cost more than $1 million.
Click HERE to calculate CMHC's mortgage default insurance amount.