Buying a second home comes with a unique set of down payment and insurance requirements. If you want to buy a cottage or another type of second home in Ontario, you should be prepared for a new down payment. There are a few potential down payment requirements. So, let’s investigate the factors affecting down payment
What is the Minimum Down Payment?
To get a mortgage for a second property in Ontario, you will have to make a down payment of at least 5%.
The minimum down payment for a second home in Ontario is based on the value of the home. The minimum down payment is 5%, which applies to all homes valued at $500,000 or less. So, if your home costs $200,000, you must make a minimum down payment of $10,000.
If the property is valued at over $500,000, but less than $1,000,000, you will need to make new calculations. First, you must factor in the 5% of the first $500,000. That means your starting point is $25,000 (500,000 * 0.05 = 25,000). Next, you need to pay 10% of the remaining balance. Any home being purchased at a price of $1,000,000 or more requires, for the most part, a minimum of 20% down.
For example, imagine your home costs $700,000…
You will pay $25,000 for the first $500,000 of your home…
Next, you will pay 10% for the remaining $200,000. That means you pay another $20,000.
Combined, a new home valued at $700,000 requires a down payment of $45,000.
Mortgage Insurance
Mortgage insurance is another value you need to factor into the cost of getting a new mortgage. Mortgage insurance is meant to protect lenders when borrowers fail to meet their repayment obligations. That’s why it’s often referred to as mortgage default insurance.
However, in order to qualify for mortgage default insurance, the insurer requires the borrower to qualify with a minimum credit score profile and a maximum GDS and TDS ratio that is not negotiable. If you’re self-employed and do not declare enough income, have a lot of existing debt, or have a bad credit score, you may not qualify for mortgage default insurance and may be required to come up with at least 20% or go with a private lender who would accept as little as 10% or 15%, but those are hard to come across and can be very expensive to borrow from.
If you make a bare minimum mortgage down payment, you will have to purchase mortgage insurance. The only way out of paying mortgage insurance is by making a down payment of 20% or more.
In some cases, lenders might not require mortgage default insurance if the down payment is less that 20%, but this is primarily isolated to private lenders who will close on a mortgage of more than 80% loan to value.
When Else do You Not Need Insurance?
As mentioned previously, mortgage insurance is unavailable for homes valued at over $1 million. Also, if, for whatever reason, the mortgage you apply for doesn’t meet any insurance companies’ minimum standards, you cannot get it insured.
What Does Mortgage Insurance Cost?
CMHC, Sagen, and Canada Guaranty insurance normally costs about 3% to 4% of the value of a mortgage. It’s paid for in full by the borrower at the start of the mortgage.
CMHC and the other two companies are all mortgage default insurance providers in Canada. This insurance is necessary for all mortgages in Canada with a down payment of less than 20%. It’s an additional cost for homebuyers and normally costs 3% to 4% of the mortgage’s balance. While it’s somewhat expensive, it allows many homebuyers to buy first or second homes with down payments that are more affordable. Without CMHC, interest rates for mortgages with low down payments would be much higher and only available through certain private lenders in certain areas.
Benefits of a Larger Down Payment
Even when you’re eligible for a very low down payment, there are some benefits to paying a larger one.
Overall, the larger your down payment is, the less risk the lender associates with your mortgage. So, once you start surpassing a 25% down payment, you start to qualify for lenders’ lowest rates in many situations. The ideal down payment will vary by lender. With some lenders, you may need to pay up to 35% to qualify for their best rates.
In addition to better rates, larger down payments make mortgage insurance unnecessary and tend to reduce your monthly mortgage payment. A larger down payment will also reduce the overall interest paid through the amortization period of your mortgage. This can remove an additional expense.
Implications of Low Down Payments
Down payments of less than 20% are lower than average. In theory, lenders who accept down payments this small are exposed to more risk. However, CMHC insurance changes the dynamic.
Because the lender is protected in the case of default, these low down payment mortgages are less risky for them. With less associated risk, lenders can often offer better rates for insured mortgages. However, it’s up to the borrower to balance the costs of insurance against the costs of an uninsured loan.
What About a Standard 20% Down Payment?
Down payments of 20% land right at the cut-off line for mandatory mortgage default insurance, such as CMHC insurance. So, 20% is the lowest possible down payment that can be made without insurance, and without having to potentially turn to a private lender. This puts lenders in a more risky spot than a 30% down payment. It’s the most risk they can assume on their own because they aren’t protected from defaults. Both lenders and borrowers also don’t benefit from the lower risk of mortgages with down payments above 30%.
For these reasons, down payments right on the 20% mark might be slightly more expensive. However, it’s the standard mortgage down payment. It’s normally still better for borrowers, as it beats most lower alternatives from B-lenders such as Credit Unions and Trust Companies. Down payments of slightly less than 20% can easily end up costing the borrower significantly more. Because the 3% to 4% CMHC payments are upfront, many borrowers feel better off paying 20% and slowly paying off the rest of their mortgage.
Last but not least, 20% is the cut-off line for a 30-year amortization. Any down payment of less than 20% makes a 30-year amortization unavailable, which will increase your monthly payments since an insured mortgage can only be amortized over a maximum of 25 years.
Next Steps
Looking for the right mortgage with the right down payment for a second home? Clover Mortgage helps individuals and families in Ontario find the right mortgage solutions. Our focus is on helping our clients by providing professional advice and guidance. We can walk you through the process of financing a second home so you can get the lowest rates for a loan that suits your personal needs.
Source for figures:
https://www.canada.ca/en/financial-consumer-agency/services/mortgages/down-payment.html
