How Much Cash Do You Need to Buy a Condo

A condo down payment is the amount of money you put towards the purchase of a condo; it’s often calculated as a percentage of the property’s purchase price. If you’re looking to buy a condo, it’s important to understand more than just how much down payment you’ll need. Below is everything you need to know about a condo down payment, including:

• How Much is a Down Payment on a Condo?;
• The Important Benefits of Maximizing Your Down Payment;
• The Purpose of a Down Payment;
• When Will I Pay a Down Payment?;
• The Difference Between a Deposit and a Down Payment;
• Understanding Who Keeps the Down Payment;
• When you need to Pay a Down Payment, and;
• Other Condo Purchase Related Expenses.

How Much is a Down Payment on a Condo?

Regulated by the federal government, down payment requirements are based on the purchase price of the property, with higher-priced properties requiring higher down payments.

The following down payment guidelines were taken from the Government of Canada Website.

Homes priced $500,000 or less require a minimum of a 5% down payment.

As an example, a home valued at $400,000 would require $20,000 as its down payment.

Homes priced between $500,000 to $999,999 require 5% of the first $500,000 of the purchase price and 10% for the portion of the purchase price above $500,000.

As an example, a home valued at $725,000 would require $47,500 as its down payment.

Homes priced over $1,000,000 require a minimum of 20% of the Purchase Price.

And, as a final example, a home valued at $1,250,000 would require $250,000 as its down payment.

Keep in mind the requirements listed above are minimums only. There are important benefits in paying more than the required minimum down payment.

The Important Benefits of Maximizing Your Down Payment

Lenders typically use Mortgage Loan Insurance to protect themselves against loss in the event of mortgage default. As Mortgage Loan Insurance may be expensive, the cost of the premiums will be paid by the borrower - you. The higher the down payment paid, the lower the cost of the mortgage insurance premium.

The good news about mortgage insurance is that lenders typically offer competitive interest rates to borrowers with insured mortgages. So, while you might pay a premium up-front, you’ll save in the long run in the form of lower interest on the lifetime of your loan.

Generally speaking, Mortgage Loan Insurance Premiums can either be paid upfront or blended into your mortgage.

To get a sense of mortgage premiums, view the Canada Mortgage and Housing Corporation’s  (CMHC) website.

The Purpose of a Down Payment

Imagine you’re considering the purchase of a $400,000 condo. Since you may not have $400,000 saved, you’ll likely make such a purchase using a down payment (money you have saved), combined with a mortgage (a loan from the bank).

A down payment acts as a form of assurance for the bank. In the event of default (failure to make mortgage payments), the bank has a better chance of recouping their costs should they face selling the property in foreclosure.

To make this clear, imagine no down payment is required by the bank - something that was formerly known as 100% financing. Even if the bank can resell the property for the same price, after facing real estate costs and legal fees, they’d be hard-pressed to recoup their costs, hence the reason for a down payment.

When Do I Have to Pay the Down Payment?

Generally, once an offer is written, a deposit (discussed next) is due first. A down payment, on the other hand, isn’t due until closer to the completion date. So, while you write an offer to purchase a property today, you may not complete on the purchase for a few months.

What’s the Difference Between a Deposit and a Down Payment?

A deposit, which forms part of your down payment, is often required when making an offer on a property. Different from a down payment, a deposit is not federally regulated, with the amount and payment deadline decided between a buyer and seller. A deposit may be more, but often less than, a buyer’s ultimate down payment requirement.

A deposit often demonstrates a buyer’s willingness to proceed (viewed as a sign of good faith) in accordance with the terms and conditions of their offer. Should a buyer fail to complete (fail to purchase) a property, the seller is generally entitled to the deposit proceeds. 

Who Keeps the Down Payment?

A seller ultimately keeps the down payment money.  Imagine, as part of a $400,000 purchase, you contribute 5% (or $20,000) as a down payment, with the bank financing the remaining $380,000.  The down payment of $20,000 and funds from the $380,000 mortgage would be passed on to the seller to form the agreed sale price of $400,000.

How to Find Help in Paying My Down Payment?

There’s no question, saving for a down payment might feel daunting. A down payment of only 5% of a $400,000 purchase is still $20,000 - something many people struggle to save for. Thankfully, Canada’s Home Buyers’ Plan (learn more here) allows you to dip into your existing RRSPs to help with a home purchase. 

Are There Extra Expenses I Need to Consider?

Yes.

Though a down payment is required by the bank in order to secure a mortgage, it does not account for other real estate related costs. Other costs you might incur when purchasing a property include legal fees, mortgage insurance premiums, GST (for land and new real estate), appraisal costs, property transfer taxes, and more.

To learn more about what you can expect when buying a condo, contact me anytime for a no-obligation consultation.