Can I Afford To Buy My Own Home?

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Can I Afford To Buy My Own Home?

Many people would like to start building equity in their own home, but are held back by concerns about cost. In fact, the Canada Mortgage & Housing Corporation estimated that 40 per cent of renters in Canada today can afford to buy their own home. If affordable housing options are available to so many renters, what’s holding them back?

Sometimes the media reports of housing prices can give a misleading impression about the cost of home-ownership. The media typically report median or average prices without explaining the distribution of home prices behind those figures.

MEDIAN PRICE
A median is that price at which half the homes sold for more while half sold for less. That means that there are just as many homes that sold at a price lower than the median than those that sold at prices higher than the median price. The median price doesn’t give any indication of the spread of these prices. Many properties are sold at much lower – and higher prices, of course -than the median price.

AVERAGE PRICE
An average price is the total dollar volume of homes sold for a particular period, divided by the number of units sold. Average prices are typically reported for the sales activity in a given area for a given month, quarter or year, and provide a snapshot of past activity. Average prices of properties sold in the past give only a limited indication of what housing inventory for sale is priced at today. An understanding of the housing in a particular community is needed to put average prices into perspective. For example, sales of a new sub-division or townhouse project of larger, upscale homes at higher prices will bring the overall average price up, giving the impression that all housing prices have risen, when in reality, prices for the older, smaller housing units in the community may not have changed, or they may have even have dropped.

AFFORDABILITY AND SELECTION
Attractive mortgage rates combined with affordability and selection have made B.C. increasingly popular for buyers. (For price and sales information Statistics area on this site.) A Realtor with experience in the community in which you’re interested in buying can provide a knowledgeable market analysis and show you what is available within your budget

What is a minimum down payment?

A down payment is the amount of money you put towards the purchase of a home. Your lender deducts the down payment from the purchase price of your home. Your mortgage covers the rest of the price of the home.

The minimum amount you need for your down payment depends on the purchase price of the home.

If your down payment is less than 20% of the price of your home, you must purchase mortgage loan insurance.

Table 1: The minimum down payment based on the purchase price of your home
Purchase price of your home	Minimum amount of down payment
$500,000 or less	5% of the purchase price
$500,000 to $999,999	5% of the first $500,000 of the purchase price 10% for the portion of the purchase price above $500,000
$1 million or more	20% of the purchase price

If you’re self-employed or have a poor credit history, your lender may require a larger down payment.

Normally, the minimum down payment must come from your own funds. It’s better to save for a down payment and minimize your debts.

Example: How to calculate your minimum down payment

The calculation of the minimum down payment depends on the purchase price of the home.

If the purchase price of your home is $500,000 or less

Suppose the purchase price of your home is $400,000. You need a minimum down payment of 5% of the purchase price. The purchase price multiplied by 5% is equal to $20,000.

If the purchase price of your home is more than $500,000

Suppose the purchase price of your home is $600,000. You can calculate your minimum down payment by adding 2 amounts. The first amount is 5% of the first $500,000, which is equal to $25,000. The second amount is 10% of the remaining balance of $100,000, which is equal to $10,000. Add both amounts together which gives you total of $35,000.

What is mortgage loan insurance?

Mortgage loan insurance protects the mortgage lender in case you can’t make your mortgage payments. It doesn’t protect you. Mortgage loan insurance is also sometimes called mortgage default insurance.

If your down payment is less than 20% of the price of your home, you must buy mortgage loan insurance.

Your lender may require that you get mortgage loan insurance, even if you have a 20% down payment. That’s usually the case if you’re self-employed or have a poor credit history.

Mortgage loan insurance isn’t available if:

the purchase price of the home is $1 million or more
the loan doesn’t meet the mortgage insurance company’s standards

Your lender coordinates getting mortgage loan insurance on your behalf if you need it.

Cost of mortgage loan insurance

The fee you pay for mortgage loan insurance is called a premium. Mortgage loan insurance premiums range from 0.6% to 4.50% of the amount of your mortgage. Your premium depends on the amount of your down payment. The bigger your down payment, the less you pay in mortgage loan insurance premiums.

Find premiums based on the amount of your mortgage:

You can pay your premium by adding it to your mortgage or with a lump sum up front. If you add your premium to your mortgage, you pay interest on your premium. The interest rate is the same rate as you’re paying for your mortgage.

Ontario, Manitoba and Quebec apply provincial sales tax to mortgage loan insurance premiums. Your lender can’t add the provincial tax on premiums to your mortgage. You must pay this tax when you get your mortgage.

How the down payment affects the total cost of your mortgage

Save as much as you can for your down payment. The bigger the down payment, the smaller the mortgage, which can save you thousands of dollars in interest charges.

Example: How the size of a down payment affects the cost of a mortgage

Suppose you buy a home that costs $400,000.

Assume the following:

interest rate is 4%
amortization period is 25 years
payment frequency is monthly
mortgage loan insurance premiums are added to the mortgage

Table 2: Effect of the size of a down payment on the total cost of a mortgage
Down payment	Down payment amount	Mortgage	Mortgage loan insurance premium	Mortgage (includes insurance premium)	Total cost of your home (includes all columns)
5%	$20,000	$380,000	$15,200	$395,200	$643,649
10%	$40,000	$360,000	$11,160	$371,160	$625,712
20%	$80,000	$320,000	Not required	$320,000	$584,979

Home buying programs, plans and incentives

Before you buy a home, consider the programs, plans and incentives available to you.

Home Buyers’ Plan (HBP)

To help you come up with a down payment, you may be eligible for the HBP. The HBP allows you to withdraw up to $35,000, tax-free, from your Registered Retirement Savings Plan (RRSP). You must use this amount to buy or build a qualifying home. You have up to 15 years to repay the amounts you withdraw.

Before you sign up for the HBP, consider:

if you can make the repayments
if withdrawing funds impacts your retirement savings.

Keep in mind:

not making the repayments could end up costing you a lot of money in income tax
you may lose out on any growth in your RRSP while the funds are withdrawn.

Find out if you’re eligible and how to participate in the HBP.

First-Time Home Buyer Incentive

First-time home buyers may be eligible for a shared equity mortgage with the Government of Canada. With a shared equity mortgage, the government offers you financing without interest. This helps reduce your monthly mortgage payment without increasing your down payment.

Through the First-Time Home Buyer Incentive, the Government of Canada offers to a first-time home buyer:

5% of the purchase price of an existing home
5% or 10% of the purchase price of a newly constructed home

You need to repay the incentive after 25 years, or when you sell the property. You can also repay it at any time without a prepayment penalty.

The property’s fair market value at the time of repayment will determine the repayment amount.

Find out if you’re eligible for the First-Time Home Buyer Incentive.