Pros and Cons of Low Down Payments

Published on 29 August 2022, 07:22:56 AM

High rents or long commutes are sapping your savings — low down payments could get you in the door of your own home sooner.

You could even take advantage of a zero down payment mortgage, although that comes with a price.

Let’s look at the pros and cons of low down payments for your home buying strategy.

Quick Read

Advantages and disadvantages of a small down payment

What is the benefit of zero-down payment?

Why is it important to have a high down payment?

How do you qualify for a low down payment mortgage?

What low down payment mortgage programs are available?

New rules when you borrow a down payment (Canada)  

Advantages of Low Down Payments

Low down payments, or high ratio mortgages as they’re called, give you a foot in the door with significantly less. With rents running around $2,079 in Toronto, buying  soon makes sense. With fixed interest rates at 4.49% for five years, $25,000 down still buys a $500,000 condo for just a few hundred more ($2,517.72) than rent. 

Strata.ca found five GTA neighbourhoods like Old East York and Flemingdon Park in that price range. Those ’70s and ’80s early generation condos offer big value per square metre and It gets cheaper farther out. Incentives for the first time buyer Ontario. 

When a Small Down Payment is Fine

It’s true you’ll pay mortgage default insurance for making low down payments. Premiums for that $500,000 mortgage are $19,000 at high ratio lenders like CMHC (Canada Mortgage and Housing Corporation). Hidden costs to consider with a CMHC high ratio mortgage. 

But low down payments may be all you need if:

Pros of Mortgages With Low Down Payments

• You want to build home equity. Low down payments get you started on homeownership quicker.
• You can live with a 25-year amortization. Home buyers with low down payments pay off their mortgages sooner.
• You want the lower interest rates a high ratio mortgage offers. That directs  more of your payment to the principal. 
• You plan to invest the other 15% you saved by choosing a mortgage with low down payment. 

Cons of Low Down Payments

• Mortgage default insurance is mandatory. You pay 4% if you put 5% down and 6.3% for a portable mortgage. 
• Low down payments have higher insurance premiums. Top up your down payment to reduce the cost.
• Amortizing default insurance adds interest to your mortgage expenses. If you can afford it, write off default insurance with a one-time, lump sum payment.
• Interest rates are lower for high ratio mortgages, but the principal you owe is higher. You pay more monthly than if you put more down. 
• Conventional mortgages qualify for longer amortization periods, spreading out the repayments. Put 20% or more down if keeping your monthly mortgage payment low is a priority. 

CMHC rules for getting a low down payment mortgage.

Are Zero Down Payment Mortgages Safe?

That depends on how much risk you are prepared to take. Flex Down mortgages require you to borrow the 5% to 10% down payment against a credit line or credit card. 

Qualifying for a Low Down Payment Mortgage

The good news is you can be a first time home buyer or long-term borrower to qualify for a mortgage with a low down payment. Here’s what high ratio lenders (for borrowers with less than a 20% down payment) look for:

1. A credit score of at least 600. Minimum credit score for mortgages (Ontario). 
2. Proof of income. Self-employed borrowers may have to show their business is stable. Qualify for a CMHC mortgage if you are self-employed. 
3. A gross debt service ratio (GDS) of 39% or less. That’s the portion of your gross annual income the principal, interest, taxes (PIT), and heat for your new home will consume.
4. A maximum total debt service ratio (TDS) of 44%. Your TDS is the PIT, plus heat and other debts like car or credit card payments.

Calculating your GDS and TDS. 

Finding Mortgages With Low Down Payments

CMHC isn’t the only high ratio lender for mortgages with low down payments.

• Homebuyer 95 at Sagen™ offers a 5% down payment option for the first $500,000 and 10% for balances up to $1 million.  
• Downpayment Advantage™ at Canada Guaranty accepts 5% down for a one- to two-unit residence under $500,000 and 10% for any balance up to $1 million or multi-unit homes with up to four suites.
• Flex 95 Advantage™ from Canada Guaranty lets you borrow the 5% down payment from a personal loan, credit line, or lender. CMHC, by comparison, only allows non-repayable gifts from immediate relatives. 

What’s Your Home Buying Strategy?

You’ve found a lender. Are you saving enough to afford a home? Try this 8-step home buying strategy:

1. Pay debts first. Check your credit score.
2. Track your spending and pay with cash. Credit cards use borrowed money. Cash is what’s in your wallet. Do credit card rewards save you money? 
3. Spend less. Pick Netflix Canada over movies and factory outlets over trendy boutiques. You’re buying a home, not financing a lifestyle.
4. Grow savings tax free. How to use a Tax-Free Savings Account (TFSA). 
5. Open, then borrow against RRSPs. More on how to use an RRSP to buy or build a home. 
6. 6. Cut back your clothing bill. Start a capsule wardrobe with mix and match pieces. Read Diary of a Toronto Girl for tips. 
7. Cook and entertain at home. Watch shows like Top Chef Canada for inspiration. Hear from Season 9 winner, Toronto executive chef Erica Karlbelnek. 
8. When you do buy a home, co-share a mortgage. Portable mortgages let you keep your mortgage terms when you change homes.  

Why You Need a Real Estate Lawyer 

When you find the condo or home you want, bring your offer to purchase to Axess Law. Our Ontario real estate lawyers review terms and conditions to advise you on additional clauses you may need to add to protect your legal or financial interests. Make an amendment to the agreement of purchase and sale. 

We negotiate with the seller’s lawyer if you need more time to get financing or a certified home inspection turns up troubling defects. When the offer is final, your Axess Law real estate lawyer liaises with your bank, credit union, trust company, or private lender to finalize the financing.

Our professional legal team discharges mortgages and witnesses your signature on your new loan documents. We search title to your new or resale home for contractor liens or other financial claims that can hold up completion of your sale. What’s involved in the real estate closing process Ontario. 

And if you want to add a spouse or family member to title, we do that too, when you complete the purchase or later. How to transfer property title to family members in Ontario. 

Affordable Real Estate Lawyers, Anywhere You Are 

Access lawyers for less in the Greater Toronto Area, Ottawa, or anywhere in Ontario  when you buy, sell, or transfer property. Axess Law’s flat fee real estate lawyers are affordable, and our rates are all inclusive (excluding taxes, disbursements, and third-party charges). Axess Law offers you only the legal services you absolutely need. Your final invoice includes no surprises or hidden charges. Your itemized statement of adjustments is explained when we deliver it, and we answer any questions you have about it. 

When to hire a real estate lawyer (Ontario).

Book Online or Phone Appointments Today

Make your next legal appointment online using our easy web booking form. For personal assistance, call us toll free at 1-877-402-4207 or dial our 647-479-0118 lawyer line. Axess Law can meet you in person at any of our conveniently located Ottawa or Greater Toronto Area law offices. Axess Law has onsite parking, and easy transit access.

We arrange virtual real estate lawyer closings by secure, confidential video conference anywhere in Ontario. See just how convenient remote closings can be. Call us to book your virtual legal appointment. 

Find a real estate lawyer near me. 

Click here to learn more about Axess Law’s real estate law services.