A down payment is a portion of the total purchase price of a property that a buyer pays upfront when securing a mortgage. It represents the buyer's initial investment in the home and is crucial in the home-buying process.
Key Points about Down Payments
- Minimum Requirement: In Canada, lenders typically require a minimum down payment of 5% of the purchase price for homes. This applies to properties priced at or below $500,000.
- High-Ratio Mortgages: If the down payment is less than 20%, the mortgage is classified as a high-ratio mortgage. This type of mortgage requires mortgage default insurance to protect the lender in case the borrower defaults on the loan. The insurance premium can be added to the mortgage amount.
- Impact on Mortgage Terms: A larger down payment can lead to better mortgage terms, such as lower interest rates and reduced monthly payments. It also decreases the overall loan amount, which can save money on interest over time.
- Equity Building: The down payment helps establish equity in the home from day one. Equity is the difference between the home's market value and the outstanding mortgage balance, and it can grow over time as property values increase and mortgage payments reduce the principal balance.