As a result of the recent financial crises, high-risk zero-down mortgages are history. This protects both the Canadian banking system and homebuyers by reducing the risk of loss.
Newly tightened mortgage lending rules now dictate that a minimum of 5 percent down payment is required to make a purchase. A down payment simply calculated by taking a percentage of the cost of the home.
Today, to qualify for an uninsured mortgage, a borrow must have a 20 percent down payment.
But, for many people, saving 20 percent is out of reach. Thankfully through Canada Mortgage and Housing Corporation (CMHC), buyer’s can secure an insured mortgage with a 5 percent down payment.
CMHC charges a fee for the insurance and publishes a table of premiums allowing borrowers to calculate the added costs. (If math freaks you out, use CMHC’s premium calculator). On a $300,000 home for example, a 5 percent down payment translates into a $7,840 CMHC premium.
The more you put down, the less insurance you’ll pay; so try to save as large a down payment as possible. Note that long-term, CMHC fees are lower than the value gained through building equity in your home.
Rent-to-own options are home ownership solutions for individuals with poor or limited credit history that wouldn’t otherwise qualify for a typical mortgage. Effectively, this is a lease combined with an exclusive option to purchase the home within a pre-specified period of time at a guaranteed purchase price.
At the beginning of the lease, a non-refundable initial option fee (down payment) is paid by the buyer – typically 1 or 2 percent of the home’s value. As the buyer pays rent, they earn lease option credits that are put towards the purchase price of the home when the buyer decides to exercise the option to purchase the property.
If you’re a first time home buyer, take advantage of the Government of Canada’s First Time Home Buyers’ (FTHB) tax credit for eligible individuals. The credit will provide up to $750 in federal tax relief.
Sidebar: Pros and Cons of Rent-to-Own
Rent-to-own is great when a buyer wants to test out the house and neighbourhood or if they need time to rebuild credit and save money. The drawbacks are that the rent paid is typically at a premium, the initial option deposit is non-refundable and bank financing isn’t guaranteed at the end of the process.
Still wondering if you should keep renting? Do the math using the buy or rent calculator on getsmarteraboutmoney.com.
Published by Metro News March 18th, 2013.