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Mortgages

What is a down payment?

A down payment is an amount of money put towards the payment of a house. Usually the house is paid off using a mortgage loan to pay off the rest of the amount. A down payment is used to make sure that lenders can get back their money should the borrower default on their payments.

With mortgages, the house being bought is used as collateral if the loan isn’t paid in full. This way, if the borrower defaults, the lender can sell the house to recoup the money that is owed to them. Down payments are typically required to protect the lender. A down payment demonstrates that the homebuyer is both responsible and serious about his mortgage.

The larger your down payment, the larger the mortgage size you qualify for and the smaller your monthly payments and total interest payments will be.

What amount is required for a down payment?

  • You will need a down payment of at least 20% to be able to secure a conventional mortgage. In this situation the homebuyer does not need to purchase CMHC mortgage insurance.
  • Mortgage loans are granted for as little as 5% down payment but they are often a high-ratio mortgage. CMHC mortgage insurance is required for mortgages with down payments less than 20% of the value of the mortgage.

Conventional Mortgages

  • This type of mortgage is offered with fixed or variable interest rates. A conventional mortgage does not need to be insured because the lender would be able to sufficiently recover its funds by selling the house should the borrower default.
  • You must prove to the lender that you can make a down payment. The higher the down payment the better. With a higher down payment you will benefit from lower monthly payments, lower interest payments and thus greater savings. You are also more likely to be accepted for your mortgage and obtain a better rate.
  • A larger down payment will reduce the cost of your loan both in terms of interest paid in total and monthly payments

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