Real Estate Down Payment Guide for First-time Home Buyers

If you’re a first-time home buyer, purchasing a home is one of the most important financial decisions you will ever make, so understanding down payments is critical. In this newsletter, we will cover what exactly a down payment is, the minimum requirements here in BC, and how it impacts your mortgage and overall affordability.

What is a Down Payment?

A down payment is the portion of the total purchase price that a buyer needs to pay in advance from their pocket for the property. The rest will be financed with a mortgage loan from the lender. This is not the same as the deposit but will form a part of your down payment as well as the total purchase price.

Minimum Down Payment Requirements in BC

Therefore, the minimum down payment requirements in BC, similar to those across Canada, are pegged on the purchase price of the property:

- Less than $500,000: Minimum 5% down payment.

• If the purchase price is between $500,000 to $999,999, the minimum down payment is 5% of the first $500,000 plus 10% of the amount over $500,000 and under $999,999.
• If the purchase price is $1,000,000 or more: 20% minimum down payment.

Calculate Your Minimum Down Payment

Here is how to calculate different down payments using different property values:

***Special note*** First-time home buyers are subject to the same down payment requirement as everyone else.

1. A $500,000 Property:

- Minimum down payment: 5% of $500,000 = $25,000.

2. $900,000 Property:

- Minimum Down Payment $25,000 (5% of $500,000) + $40,000 (10% of $400,000) = $65,000.

Example: A home is worth $900,000.

The first $500,000 is 5%= $25,000, and then $40,000 (10%) for the amount between $500,000 to $900,000.

Total minimum down payment required= $25,000+$40,000= $65,000.

3. $1,200,000 Property:

- Down payment: The minimum would be 20% scoop of $1,200,000 = $240,000.

Impact of Size of Down Payment

The size of your down payment will impact a few things:

1. Affordability: The size of the down payment reduces the amount of debt to be incurred, which then allows a buyer to afford a higher-priced home.

2. Mortgage Type: Putting less than 20% down requires mortgage default insurance, whereas 20% or more avoids it.

3. Monthly Payments: The larger the down payment, the lower your monthly mortgage payments and the total interest you pay over the life of the loan.

Mortgage Default Insurance

For high-ratio mortgages, that is, less than 20% down, default insurance on a mortgage is compulsory. These premiums can be in the range of 0.6% to 4.50% based on the amount lent and can now be paid through an upfront payment or added to the mortgage's principal, which incurs interest.

Down Payment Assistance Programs for first-time homebuyers

• First-time Home Buyers' Program: This program allows first-time home buyers reduce their closing costs by reducing or eliminating the property transfer tax that the buyers have to pay. As of April 1, 2024, you can get tax exemption when purchasing a home worth up to $835,000. The property transfer tax is fully exempted on the first $500,000 of the home's value, which is a saving of $8,000. Buyers will be able to get partial exemption if the property value is under $860,000.
• Home Buyer's Plan: The Home Buyer’s Plan allows you to?withdraw up to $60,000 from your RRSP tax-free towards the down payment for purchasing your primary residence, with a 15-year repayment period.
• First Home Savings Account: The First Home Savings Account (FHSA) is a savings and investment tool to help first-time home buyers boost their down payment savings. You can put as much as $8,000 a year into an FHSA, up to a maximum of $40,000. Contributions are tax-deductible, and the money inside an FHSA can be invested in products like stocks, bonds, and GICs, so your savings grow more quickly. The earnings from these investments are tax-free.

Knowing the intricacies of the down payment can help one make some important decisions when buying a house. Knowing the minimum requirements for utilizing assistance programs can make quite a big difference and may even ease the process of buying a home to a great extent.

For more details, reach out to Barton Lui Realtor by call/text 604-715-5568 or email me at [email protected]