# 5% downpayment or 20%



## Juggernaut92 (Aug 9, 2020)

Hello all,

I have a goal of eventually getting a property (condo/townhouse/house). There is one thing that I did need a bit of clarification on. 






How much you need for a down payment - Canada.ca


Figure out how much you need for a down payment, when you need mortgage loan insurance and how your lender sets your mortgage loan insurance premiums.




www.canada.ca





In the above link it states that if you want to get a property under $500,000 then you have to have a min downpayment of 5%. Here comes the issue. I did want to verify this with a real estate friend and did end up talking to him about it. He said he wasn't sure where I heard that but that he always recommends his clients have the 20% downpayment set aside. He also said that he recommends some people to get a mortgage broker as well just to secure the property. 

At this point I am confused and wanted to know if someone could clarify the above on the 5% downpayment. I live in ontario and in the Greater toronto Area if that helps. I think it would make sense if he meant that 20% is good to have to secure the property for sure but he didnt hear about the 5% downpayment thing at all. Also, I wanted to know is there a different downpayment scheme for preconstruction houses vs properties that are already built and is being sold by the owner? Lastly, what is the usefulness of a mortgage broker?

Any feedback would be appreciated.


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## birdman (Feb 12, 2013)

I expect the 5% down payment would apply to an insured mortgage where the lender lends you 95% of the purchase price and the insurer guarantees repayment of the mortgage. CMHC (Central Mortgage and Housing Corp) is one of the most well known insurers. Heres the catch: Traditional lenders usually lend up to a maximum of 75% of the purchase price and this is referred to as the L/V (Loan to Value ratio). With an "insured" mortgage you must pay the insurance fee which for CMHC is I believe 4% of the purchase price or $20,000. (based on a $500,000. pp) which is added to the mortgage. Here is a link to CMHC:





CMHC — Mortgage Loan Insurance Cost


The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment.



www.cmhc-schl.gc.ca


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## sags (May 15, 2010)

These days it is also common for there to be bidding wars on homes. People are listing their homes for a price that attracts buyers. Then their agent tells interested clients that they have to submit a "bid" accompanied by a certified cheque. In Toronto and some places, the cheque required may be as high as $100,000.

The local forums are full of people wasting their time going from listing to listing and finding themselves outbid for homes. It is very frustrating for them to spend all that time putting together offers and then falling well short of buying the home.

Personally, I think this is a practice that should be made illegal. It is a "bait and switch" scenario. People should be able to buy homes for the "list" price.

People struggling to put together a down payment are often not prepared or have the resources to hand over a certified cheque for those amounts.

It isn't surprising that young adults are so frustrated.


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## STech (Jun 7, 2016)

5% is the minimum down payment for any property under 500K. From 500K to 1 million, you'll need 10%, and anything above a million you'll need 20% down.

Your realtor friend is very right, you'd be surprised how much a mortgage broker can do for you in terms of advise, doing all the leg work, and more importantly point out pitfalls that could cost you small fortune.

As to how much to use as a down payment? On the surface typically putting down at least 20% is good, but sometimes it's actually better to buy a little bit of mortgage insurance and get lower interest rates. Lots of calculations and considerations.

And the note about traditional lenders only lending up to 75% LTV is inaccurate. They'll lend up to 95%, non traditional lenders will much less.


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## MrBlackhill (Jun 10, 2020)

Your link tells it all. I did buy a duplex with 5% down payment and I had to pay the CMHC.

Minimum down payment

Property price <= 500k$ : Minimum 5% (example : 5% of 400k$ = 20k$ for a property of 400k$)
Property price above 500k$ but below 1M$ : Minimum 5% of 500k$ + 10% of extra above 500k$ but below 1M$ (example : 5% of 500k$ + 10% of 250k$ = 50k$ for a property of 750k$)
Property price >= 1M$: Minimum 20% (example : 20% of 1.2M$ = 240k$ for a property of 1.2M$)
You need a mortgage insurance if your down payment is less than 20%.

Premium if <10% is 4.00%
Premium if <15% is 3.10%
Premium if <20% is 2.80%
Example

You buy a 750k$ property, you need at least 50k$ which is 6.67% down payment
You will have to pay the mortgage insurance at 4.00% premium
You mortgage will be 750k$ - 50k$ = 700k$ then add 4.00% premium = 728k$
Please refer to the link below





How much you need for a down payment - Canada.ca


Figure out how much you need for a down payment, when you need mortgage loan insurance and how your lender sets your mortgage loan insurance premiums.




www.canada.ca


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## Just a Guy (Mar 27, 2012)

The down payment is dependant on the appraised value of the home when you refinance as opposed to make it a condition of sale. So if you Bought a place for 50k, and made it subject to financing, the appraisal nearly always comes out +/- 10k of the price you offered and you usually need 20% down for a rental property, though some banks allow only 5%.

however, if you pay cash for that 50k at the time of buying (using money or credit from somewhere else say a heloc) you can refinance the place the day after purchase. When you refinance, they send out for a real appraisal, who looks at comparable properties and comes back with a more realistic price for your propeerty ( as many people point out, no properties are worth as little as 50k, even though I find them). So, the appraisal comes in at 65k let’s say, you need a 20% down payment, so the banks offers You a mortgage for 20% less than your appraised value of 65k, so they will give you a mortgage for 52k, and you need $0 for a dow payment as its built into the difference between the appraised value and the mortgage you got. You’ve generated instant equity of $13.5k with the appraisal and financed the Property 100%. Any money you now make is technically an infinite return on investment as you have no money in the investment.


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## MrBlackhill (Jun 10, 2020)

MrBlackhill said:


> I did buy a duplex with 5% down payment and I had to pay the CMHC.


The thing is, I had 5% but not 20% and I would've never been able to catch up the price increase of the properties to get to 20%, so I decided to pay the CMHC even though it's a lot of wasted money.

Say I want to buy a 750k$ property, I need 50k$ minimum or 150k$ to have 20% and avoid CMHC.
Say I have 50k$ but not 150k$.
Say I can get to 150k$ in 5 years.
But then, in 5 years, that property will be 960k$ so I now need 192k$.
I get to 200k$ 2 years later, that property is now 1.1M$, which is not enough, again.
I get to 240k$ 1 year later, that property is now 1.15M$ and I can buy it.
Took me 8 years to buy that property.

Let's say I accumulate cash much faster than this example, twice as fast.
In years 4, I get to 180k$ and the property is 900k$ so I can buy it.
Took me 4 years, still.

It depends when you want to buy, how fast you can accumulate and how fast the property prices increase.


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## Prairie Guy (Oct 30, 2018)

sags said:


> Personally, I think this is a practice that should be made illegal. It is a "bait and switch" scenario. People should be able to buy homes for the "list" price.


List price is just a starting point to attract potential buyers, it's not a signed contract between two parties. I can list my house for any price I choose and can accept or deny any offer that comes in regardless of how much above or below the asking price it is.

It's exactly the same when I list something for sale on kijiji...I can accept or refuse any offer that comes in regardless of the price.


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## ian (Jun 18, 2016)

Competitive bidding is part of the system. Making it illegal will not help. Sellers will simply list the price well over market and then accept the highest bid to their asking price.


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## Johnny199r (May 20, 2014)

It should be an auction like in Australia. The problem with Canada is sellers can lie to an interested buyer about other offers, which results in a buyer bidding against himself.


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## ian (Jun 18, 2016)

Our friends in Oz just sold their home and bought another via the auction process. Seems to work well there. We bid on a home in Calgary eight years ago and were fortunate enough NOT to be the winning bid. The process was simple. We had no idea what the other bids were. Offers were to be opened on a certain day. The seller would select the winning offer based on a combo of price and conditions. No idea what the winning bid or if it sold above listing price.


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## Just a Guy (Mar 27, 2012)

That’s how court sales work here. Then again buyers should know what price they want to pay and not get caught up in the bidding frenzy.


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## Juggernaut92 (Aug 9, 2020)

@frase : I see. That makes a bit more sense. So if your down payment is under 20% then you incur an additional mortgage insurance fee.

@sags : Yes I have heard of bidding wars. a certified cheque for $100,000 is crazy. Is this why preconstruction properties are a bit more popular with new homeowners? as their is no bidding war?

@STech : Yes from what I heard from my friend it just sounded like 20% downpayment was just a better way to make sure you get approved for sure. Doesn't paying under 20% make you incur additional costs for the mortgage insurance?

@MrBlackhill : Thanks for pointing that out. It looks like I missed the bottom section of that link. Would their be any purpose of mortgage insurance if your downpayment is above 20%? But getting mortgage insurance essentially costs you more money in total on the house in the long run then.
I ready your other post as well and it was helpful. So maybe if i use mortgage insurance and use a 5% downpayment on a property that will increase its price fast then the extra interest will be worth it?

@Just a Guy : I see. That is an interesting point about the appraisal process changing the value of the downpayment you are giving. I am not too familiar with what you mean when you talk about refinancing. Is that something that happens right after you purchase the property?

@Johnny199r : I was not aware of that but that is probably what people mean when they say bidding wars.


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## MrBlackhill (Jun 10, 2020)

Juggernaut92 said:


> @MrBlackhill : Thanks for pointing that out. It looks like I missed the bottom section of that link. Would their be any purpose of mortgage insurance if your downpayment is above 20%? But getting mortgage insurance essentially costs you more money in total on the house in the long run then.
> I ready your other post as well and it was helpful. So maybe if i use mortgage insurance and use a 5% downpayment on a property that will increase its price fast then the extra interest will be worth it?


There's no single answer to what's best to do. In most cases, it's better to have 20% down payment. In my specific case, I could not wait.

You just have to be aware that a lower down payment not only increases your mortgage, but you'll have to pay the insurance which will increase your mortgage even more and as you know, a bigger mortgage means more money loss in interests.

See, there's a big difference :

500k$ property with 5% down payment means a 494k$ mortgage when including insurance and that mortgage at 1.99% leads to 2089$/month for 25 years
500k$ property with 20% down payment means a 400k$ mortgage no insurance required and that mortgage at 1.99% leads to 1692$/month for 25 years









Mortgage Payment Calculator Canada | Ratehub.ca Mortgage Calculator Canada | Calculate Mortgage Payment


Calculate your monthly mortgage payment, see the corresponding amortization schedule, and test down payment scenarios using our mortgage payment calculator.




www.ratehub.ca


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## Just a Guy (Mar 27, 2012)

Financing is Your original lending as part as an offer to purchase or, technically any financing or payment for something. You refinance things afterwards, as it consolidation loans, or getting a loan on something already paid off or partially paid off. You’ve already financed it once, now you’re refinancIng it. Or doing it again. In the example I presented you buy the property outright using some other source of money, the. You get a mortgage or refinance it as it has a clear title, no loan is registered against it, but you are getting a loan on it.
if the property is clear title, you can walk into the bank the same day you purchased it and apply for refinancing.

a 20% down payment avoids the need for cmhc insurance which only benefits the bank.

bidding wars only happen in hot markets with easy Lending. Right now we have neither, so bidding wars are on hold. I’ve seen a property I’m interested in get two offers tha fell through because thry couldn’t get financing on 55k. I’ve offered 50k cash, the guy may need to take it as no one else has access to cash. Same with a second property I was interested in, it just fell through too, I’ll be making an offer this week, I don’t expect competition.


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## MrBlackhill (Jun 10, 2020)

Just a Guy said:


> bidding wars only happen in hot markets with easy Lending. Right now we have neither, so bidding wars are on hold.


Not so sure it's over. I bought last year in after seeing lots of properties during the winter. Even if it was winter, there were people waiting in line outside the properties because there was already too much people inside. There was about 30 to 50 people at the same at every single property we visited - and we visited a lot, maybe 20 or more. We've bid on a few of them, but then there was from 10 to 15 bids and the properties would end up being sold 10% to 15% above the asked price. We finally got lucky on a property which we could offer 10% below the asked price as we were the only offer. I currently have 3 friends looking to buy and it's the same game.


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## STech (Jun 7, 2016)

Juggernaut92 said:


> @STech : Yes from what I heard from my friend it just sounded like 20% downpayment was just a better way to make sure you get approved for sure. Doesn't paying under 20% make you incur additional costs for the mortgage insurance?


In most cases, yes you're better off to save the insurance premium. In some cases, it's not. And it's definitely false more than 20% will give you a better chance at getting a mortgage approval. 

Check your PM. I sent you a message.


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## Raggedy Dandy (Mar 12, 2020)

Just a Guy said:


> That’s how court sales work here. Then again buyers should know what price they want to pay and not get caught up in the bidding frenzy.


That's exactly what we did with our current place. We gave our agent our maximum number, which she said would not cut it based on comparable houses in the neighbourhood. We sent it in anyway, and managed to get the house. I know there were several other offers, but I don't know if we were the highest bid.


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## Juggernaut92 (Aug 9, 2020)

@MrBlackhill : Yes that makes sense. Thanks for posting that it does make things clearer in terms of the added mortgage insurance costs. That is crazy about how many people are lining up to buy a property. Is it easier to pay for a property that has not been built?

@Just a Guy : I see. What you said earlier is starting to make sense. Yes some people do refinance their homes while they still have not fully paid it off. How does avoiding the mortgage insurance only benefit the bank. Doesnt it benefit the buyer as well because they dont have to deal with extra costs?


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## Eder (Feb 16, 2011)

Buying before construction is like ordering pick up at Loblaws...the tomato s may be over ripe


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## Just a Guy (Mar 27, 2012)

> @Just a Guy : I see. What you said earlier is starting to make sense. Yes some people do refinance their homes while they still have not fully paid it off. How does avoiding the mortgage insurance only benefit the bank. Doesnt it benefit the buyer as well because they dont have to deal with extra costs?



Cmhc only benefits the bank. Say you default, and you aren’t an owner in Alberta or Saskatchewan where they have no recourse mortgages still, the bank foreclosures, and resells to cover the costs. If they don’t recover the costs, Cmhc will make up the difference to the bank. Of course, Cmhc can come after you for these costs later and you’d have Then pay them back. 

It’s insurance for the bank not you.


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## Mortgage u/w (Feb 6, 2014)

Juggernaut92 said:


> Hello all,
> 
> I have a goal of eventually getting a property (condo/townhouse/house). There is one thing that I did need a bit of clarification on.
> 
> ...


You can purchase up to $500k with only 5% down for a single or 2 unit property. 3 units or more is min 10%. A property over $500k would require 5% for the first $500k and 10% for the balance up to a max of $1M. Anything over $1M requires 20%.

What allows you to purchase with less than 20% is mortgage insurance which your mortgage lender will obtain and add a premium to your loan. Depending LTV, you can expect roughly 4% insurance premium added to your loan. Most recognizable insurer is CMHC which is controled by the governement. You also have Genworth and Canada Guaranty which are private entities but offer the same benefits and charge the same rates. Ultimately, your lender will decide which insurer they will choose.


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