With interest rates at historic lows, many people’s dream of owning a home is just within reach. However, as housing prices climb in BC and Canada, obtaining financing becomes more difficult. Even those who manage to qualify for loans may find that saving enough money for a sizable down payment is beyond their means, especially when you consider additional costs such as mortgage insurance premiums and land transfer taxes.
According to recent reports from Statistics Canada and The Teranet-National Bank National Composite House Price Index (via The Canadian Press), the average price of a detached bungalow in Vancouver exceeds $1 million, a increase 19% over last year. This represents the highest price ever recorded by the index.
The good news is that there are several ways to buy a home in BC, even if you don’t have a sizable down payment.
Ways to buy a House
This article will explore some of the most common methods used to purchase property in the province.
Option 1: Buying with all cash
One option is to buy a property outright with cash if you have the means. This eliminates the need for a mortgage altogether, although it may be more challenging to find a property within your budget if you’re not willing or able to pay in full.
Option 2: Buying a home with a loan and no down payment
Another option is to take out a loan and put down zero percent as your down payment. This is called a “zero down mortgage.” With this type of loan, you will typically have to pay a higher interest rate and may be required to purchase mortgage insurance. However, it can be a great way to get into the housing market if you haven’t saved up much money.
Option 3: Buying a home with a loan and a down payment
The most common way to buy a home in BC is by taking out a loan and putting down a percentage of the purchase price as your down payment. The size of your down payment will determine the amount of money you need to borrow from the bank and affect your monthly payments and the overall mortgage cost. Generally speaking, the more you put down upfront, the lower your monthly payments.
Size of your Down Payment
A borrower’s risk profile determines the size of a down payment, which is evaluated using a credit assessment and home appraisal.
- If you have a low-risk profile and a strong credit score, you may qualify for a loan with as little as 5% down (also called “5-95 financing”).
- For people who don’t meet these requirements, lenders typically require at least 10% or 20% down, depending on how much money is borrowed.
- Mortgages that require only 5% or 10% down are referred to as “high ratio mortgages.” Those requiring 20% or more are sometimes referred to as “low ratio mortgages,” although this term is not technically correct.
Is 5% down payment enough for a house?
Yes, even a down payment of 5% will suffice in some cases. In fact in British Columbia, the minimum down payment required for a home purchase is 5% of the purchase price. For example, if you purchase a home for $400,000, your minimum down payment would be $20,000. If you buy a home for $1,000,000, your minimum down payment would be $50,000.
There are a few exceptions to this rule. If you purchase a home designated as a “high-ratio” mortgage (i.e., the loan amount is greater than 80% of the purchase price), you will be required to make a minimum down payment of 10%. Additionally, if you are purchasing a property, not in Canada or the U.S., such as a condominium, you will be required to make a minimum down payment of 20%.
Incentive for First Time Home Buyers
The Canadian Government offers a special incentive to first time home buyers in the form of a shared equity mortgage plan. Under this plan, the first time home buyers can avail financing upto 10% of the total property value without any interest.
The incentive amount availed needs to be repaid after 25 years or when the property is sold. it is also important to note that the repayment amount varies and depends on the market value of the property at the time of the repayment of the incentive amount.
Welcome Home Programs
There are also some exceptions for those who qualify for special programs such as Welcome Home programs that allow them to withdraw funds from their RRSP (Registered Retirement Savings Plan) or similar accounts with no penalty. For example, if you qualify for this program and your down payment is $20,000 – you can borrow up to an additional $20,000 from your RRSP. If your RRSP is not large enough to provide all this money – there are loans available so that these withdrawals will not incur any penalty fees such as interest on those funds. But do remember that the money borrowed from the RRSP funds has to be repaid back within 15 years.
Mortgage Insurance Requirements
If you have a traditional loan and a down payment of less than 20%, your lender will require private mortgage insurance (PMI), which is an additional insurance policy that protects the lender if you default on your loan.
These insurances are to safeguard the lender in case of mortgage default. The insurance premium for generally fall in the bracket of 0.6% and 4.50% of the mortgage amount. The buyer has the option of paying the premium one time at purchase or getting it added to your monthly mortgage payments.
Other forms of loans may also need you to get mortgage insurance. Mortgage insurance may be added to your loan amount, increasing the amount of interest you pay throughout the life of the loan, depending on the type of loan and its terms and conditions. Furthermore, even if you reach 20% equity in your house, you may be required to continue paying mortgage insurance.
The Final Word
If you are looking to purchase a home in British Columbia, knowing the minimum down payment and understanding the different requirements is essential. By understanding these requirements, you can plan and save up accordingly. Additionally, if you have any questions regarding this information, you should consult a mortgage professional.
Even if you don’t have much money set aside for a down payment, purchasing a home is not impossible. As explained you can opt for a “zero down mortgage” or “high ratio mortgages.” It’s crucial to shop around for the best lender and loan type. Expect to pay higher loan costs and interest rates, as well as PMI, if you have a lower down payment. Remember to take advantage of any down payment help programmes given by your state or local authorities. If someone gives you money to help with your down payment, be sure they realise that it is not a loan.
Saving for a down payment takes time, discipline, and effort. But the end result—owning a home—can be financially and personally satisfying.