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Can I Afford to Buy a Home with a Small Down Payment?

Today’s first-time homebuyers find it increasingly difficult to find enough cash for the minimum down payment required for a new home. While recent mortgage rates have been relatively steady and low, the Canada Mortgage and Housing Corporation (CMHC) established new minimum down payment rules in February. If home prices in Canada continue to rise through 2017, will you be able to afford a new home? More specifically, will you be able to make a small down payment and still be able to purchase your preferred property?

To help you answer those questions, we’ve summarized the new down payment rules. We’ll also take a look at the range of home prices you may be able to afford, depending on the size of your down payment.

How much of a down payment do I need to make?

The size of your minimum down payment will ultimately depend on the purchase price of your new home. For homes priced below $500,000, you’ll only need to present at least 5% of your home’s purchase price for your down payment. However, your down payment increases as you start looking at higher-priced properties. For homes priced between $500,000 and $1 million, CMHC now requires a 5% down payment on the first $500,000 in addition to a 10% down payment on the remaining amount. Finally, million-dollar homes will require a more substantial down payment of at least 20% of the purchase price.

For example, we’ll assume you have $20,000 on hand for your down payment. In this case, you’d be able to afford the minimum down payment required for homes priced at $400,000 and under ($400,000 x 5% = $20,000). Trying to estimate what you can afford? To make matters simpler, here are the down payments you’ll need to make for a range of different home prices:

The implications on location

Not quite ready to take $50,000 out of your high-interest savings account? If you’re hoping to make smaller down payments, there are still a number of affordable housing options available across the current Canadian real estate market. And by estimating the down payment you can afford, you can also speed up your home search. For example, if you plan to make a down payment of $25,000 or less, then you can narrow down your search to homes priced at $500,000 and under.

Although the average home price in Canada currently sits at $503,301 (as of June 2016), this statistic is considerably influenced by the hot real estate markets in Toronto and Vancouver. Luckily, there are a number of cities and neighbourhoods across the nation that have yet to experience such heavy price increases. As of June 2016, average home prices stand at around $378,389 in Ottawa, $466,717 in Calgary, and $353,535 in Montreal. Average home prices are also as low as $192,115 in Prince Edward Island if you’re looking to move to the east coast.

However, the prospects of being able to afford a home with a $20,000 down payment don’t look as good in some other cities within Ontario and British Columbia. The average home will cost you $694,925 in British Columbia. But at the same time, homebuyers can still find a home outside of Toronto in the Hamilton-Burlington, Ont. area for an average prices of $513,971. For first-time homebuyers who aren’t looking to move into the priciest cities, the outlook on buying homes with small down payments are still quite positive!

Making a good decision

Even with positive prospects, it’s still beneficial to take the time to set expectations according to your personal budget. Aside from the size of your down payment, there are still many factors to consider. If you’re planning on making a down payment of less than 20% of your home’s price, you’ll need to pay mortgage default insurance premiums. You’ll also need to budget for land transfer taxes and closing costs. These expenses can all make budgeting seem a bit more complicated than expected. However, once you’ve estimated the size of your down payment size and home price, you can use our mortgage calculator to estimate the total mortgage amount you’ll need. Based on those numbers, you’ll also get an overview of the different closing costs you’ll need to pay.

If you choose to make a $20,000 (5%) down payment on a $400,000 home, as in our previous example, our calculator will let you know that a $393,680 mortgage will be needed ($380,000 + $13,680 in mortgage insurance).  If you choose a 25-year amortization period and a five-year fixed rate of 2.28%, your monthly interest payments will be $1,721. It’s a good idea to ask yourself whether or not payments of this amount can realistically fit into your monthly budget, even if you can currently afford a $20,000 down payment.

If not, consider buying a less expensive home. With a $20,000 down payment (a 6.7% down payment) on a $300,000 home, your required mortgage is reduced to $290,080. Moreover, with the same amortization period and payment frequency from the previous example, your monthly mortgage payments become $1,268. That’s also $453 less in monthly payments than the previous example!

The bottom line

With a small down payment, it won’t be impossible for you to afford a new home. However, set realistic expectations based on the cost of housing in your city or neighbourhood. By targeting your home search accordingly, you may be able to turn your expectations into reality.

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