The advantages of buying with a down payment exceeding 20%

by Multi-Prêts Mortgages

What you’ll learn

• The time factor
• Loan insurance
• Mortgage rules 

When the time comes to buy, is it better to put down a big down payment? As every situation varies greatly, it’s impossible to provide a definitive answer. Your decision should take your needs, your means and your targeted market into account.

However, here are a few elements worth considering if you’re thinking of buying a property with a down payment of over 20%.

The time factor

If your goal is to take a few years to build up a 20% down payment, time and the ups and downs of the housing market will be determining factors.

If you don’t foresee a considerable increase in property values, it may be worth it to wait. Same goes if interest rates aren’t set to increase between now and the time you’ve saved up your down payment. No one knows what the situation will be in a few years.  

Keep in mind, however, that a down payment of less than 20% doesn’t give you access to mortgages with amortization periods of more than 25 years.

CMHC insurance premium

The government requires lenders to insure all mortgage loans with a down payment of less than 20%. The loan can be insured by the CMHC, Genworth or Canada Guaranty. The premium is calculated according to a percentage that varies according to the value of the loan in opposition the price of the property (between 0.6% and 4.5%). The lower the down payment, the higher the percentage. This amount is added to your monthly payments.

If clients give a 20% down payment, their interest rate may be higher with most lenders (depending on whether the loan is insurable or not). As such, it may be better for a client to give 19%, as the cost of the insurance premium, plus tax, may be lower than the extra interest costs. This is a consequence of the new rules on conventional loans.

In Quebec, QST is added to the premium, and must be paid at the time of purchase. All in all, this can add up to several thousand dollars.  

With a down payment of more than 20%, there is no need to insure your loan. Read our article to find more about CMHC insurance premium. 

New mortgage rules

In 2016, the federal government established measures to reduce the number of high-risk buyers. With a down payment of more than 20%, those new rules don’t apply. Read our article to find out more about these rules.

Purchasing an undivided co-ownership

In Montréal, some co-ownerships fall into the undivided co-ownership. A 20% down payment is required to purchase them.

Finally, here are a few tips and tricks to help you save up for a down payment.

Key takeaways

• If your goal is to take a few years to build up a 20% down payment, time and the ups and downs of the housing market will be determining factors.
• A down payment of less than 20% doesn’t give you access to mortgages with amortization periods of more than 25 years.
• The government requires lenders to insure all mortgage loans with a down payment of less than 20%.