With your pre-approved mortgage in hand, you will have a better idea how much you can afford to spend on your new home. But before you go house hunting, there are some other financial matters to consider, starting with your down payment.
The down payment is the portion of the purchase price that you provide before moving in. (The mortgage covers the balance.) So the price of the property you buy will be the combined amount of your mortgage and down payment. But the size of your down payment can impact more than just the purchase price. Other factors you should consider include:
How Your Down Payment Can Affect Your Mortgage
You will be glad to know that there are different options available depending on how much of a down payment you can afford. The first cost implication of your down payment is whether you will have to carry mortgage default insurance:
- If you can raise a down payment that is 20% or more of the home’s purchase price, you can apply for a conventional mortgage meaning that the mortgage won’t have to be insured against default and you will have lower carrying costs.
- If your down payment is less than 20% (say 5% or 10%), you can apply for a low down payment mortgage. A low down payment mortgage requires mortgage default insurance. (Your mortgage broker can help you arrange that.) The mortgage default insurance premiums can either be paid up front, or added to the mortgage and paid off as mortgage payments are made.
- You should have 1.5% of the purchase price to cover your closing costs.
- With all mortgages, you are responsible for the appraisal and legal fees.
Saving Money with a Larger Down Payment
All other things being equal, the smaller your mortgage, the lower your interest costs. Putting down as much money as you can up front can add up to a significant interest savings over the long run.
For example, the table below shows how an average homeowner can save more than $16,000 in interest costs on a $100,000 home by making a down payment of 20% versus the minimum down payment of 5%.
Down Payment % Down Payment Amount Mortgage Principal Total Interest Paid
5% $5,000 $95,000 $104,616
10% $10,000 $90,000 $99,110
20% $20,000 $80,000 $88,097
Finding the Funds You Need
Of course, it’s all well and good to recommend a higher down payment, but where will the money come from? Consider these three common strategies:
- Dip into your savings. You will save on interest costs and possibly mortgage default insurance costs over the long term.
- Secure a nest egg from a parent or relative.
- Use your RRSPs (if you are a first time home buyer).
Additional Costs to Consider
When you’re calculating your mortgage and down payment figures, don’t forget to reserve some funds to cover costs that are bound to come up when you’re moving into your new home, including:
- Closing costs and other additional home costs. The closing costs you pay will depend in part on your mortgage and the province in which you buy. You may also need to pay for an appraisal and a new survey of the property. If you’re buying new construction, you may have to pay a new home warranty fee. Your lawyer or notary will be able to give you details of these costs.
- Moving Costs. Whether you hire movers to pack, transport and unpack your possession or you do it all yourself, you will incur costs.
- New Home Costs. Think of all the things you want and need to make your new home feel like home (especially if it’s your first). Then think of the things you need (such as cleaning supplies) just to get moved in. These short-term costs all add up, so try to tally up and factor them into your initial costs. If cash is tight, you can always consider a line of credit or credit card to help cover these expenses.