Mortgage Down Payment

A mortgage down payment is the amount of money financial institutions require mortgagors to have before extending a mortgage loan. In Canada, the down payment is in the range of 5 percent and 20 percent of the property’s purchase price. A conventional mortgage loan will require a minimum down payment of 20 percent and will be offered with a variable or fixed interest rate. The advantage of conventional mortgage loans is that they have low carrying costs. The reason is that financial institutions do not require insurance against default. Many financial institutions in Canada offer insured mortgages intended for resale and new homes. The required down payment is lower and can be as low as 5 percent. In this case, the insurance premium increases the carrying costs. Mortgage default insurance is a type of insurance whereby one-time premium is paid on purchasing a property. The premium can be added to the mortgage’s principal amount or it can be paid up front.

In general, a small down payment is a mixed blessing for mortgagors. The lower it is, the higher the interest charges and mortgage insurance and the greater the monthly payment amount. Mortgagors who insure their loan with Genworth or CMHC pay a premium. The loan amount and down payment determine the premium, but typically, the fees are in the range of 1 percent and 3.5 percent of the principal amount. Here, the maximum property price varies by the market while it is the financial institution that sets the mortgage term. Mortgages of this type are called high-ratio mortgages in Canada.

A large down payment, on the other hand, reduces the interest payment, the principal, and the total amount of interest to be paid over the mortgage term. A large down payment is recommended to persons who approach retirement and those who seek to reduce the principal amount for the purpose of mortgage refinancing. Some argue, however, that there are better things to do with your money than paying off a debt, going with a low interest rate. A mortgage loan is among the cheapest money a borrower gets.

Savings may seem impressive when you do the math. For example, if you take out a 30-year mortgage at 6 percent, in the amount of $250,000, you will save over $140,000 in interest charges by paying an extra $500 a month. You will also pay the mortgage in full fourteen years earlier. While interest savings may look considerable, they are spread out over many years and eventually, their value will be eroded by inflation. A better way to use your money may be to contribute to a retirement plan. The reason is that you will get higher returns than if you pay a low interest rate debt. On the other hand, those who are maxing out their retirement money may want to start making extra mortgage payments.

When you consider the down payment you want to make, there are three questions to ask. First, what is the minimum down payment your lending institution requires? This varies from lender to lender and depends on the type of mortgage you want to take. It can be zero, 10 percent, and even more. Second, if you want to pay more toward the down payment, how much can you realistically afford? Your personal finances will determine this. It is important to have some liquid funds for emergencies, investments, and your monthly expenses. Third, how much will you save in the long run? You may want to compare the impact of making a maximum and minimum down payment to determine this.