Save Your Down Payment. Mortgages are defined as either conventional or non-conventional. A conventional mortgage means that you are able to provide 20 per cent or more of your loan at pre-approval. They are called “conventional”, even though not very many people can actually afford this type of loan, because they do not require loan insurance (also called loan default insurance). Conventional loans are also referred to as “low-ratio” loans.
By far the vast majority of the population has non-conventional mortgages, which are mortgages that were provided with only five per cent or more of the loan as a down payment, but less than 20 per cent. Non-conventional mortgages are also commonly called “high-ratio” loans, and must be insured. Coverage is provided through three national sources: Canadian Mortgage & Housing Corporation (CMHC), Genworth & Canada Guaranty.
Loan Default Insurance rates start at 0.5 per cent and vary according to the down payment and authorization. These fees usually can be added directly to your mortgages payments.
According to a May 2013 estimate from Genworth, the national average purchase price for a first-time buyer is around $295,000. That means buyers would need to save $14,750 for the minimum 5 per cent down payment. Don’t forget about closing costs, too. They can reach as much as 3 per cent of the purchase price of a home, or in this case, another $10,000.
It is tough to save these days but it can be done. Make sure to put any extra cash you may come across (such as tax refunds and bonuses) directly into the bank, and make sure to capitalize on a tax-free savings account.
Another option is to make use of the federal government’s Home Buyers’ Plan (HBP), which allows Canadians to use up to $20,000 of their RRSP savings for their home’s down payment. Partners may combine their resources. Your RRSP must then be repaid within 15 years.
As well, gifts from parents and loved ones get a lot of people started as home owners. If the amount can be proven to have been given to you, and it’s in your bank account, then most lenders will accept gifted money. Sometimes the generous donor may be asked to sign a gift letter to say that the funds were not a loan, and are not expected to be paid back.