The Deposit and the Down payment
What is the difference?
When you are negotiating an Agreement of Purchase and Sale as a potential purchaser, the vendor (or the Builders sales representative) will ask you for a deposit. This is a “good faith” amount of money that shows the builder that you are in a financial position to be able to purchase their property.
The deposit is not a percentage of the purchase price and can be any amount, although it is usually between $1,000.00 and $10,000.00. This amount is given as a cheque payable to the Builder or to the Builders Real estate agent, in trust. The lawyer or agent will keep your deposit in a trust account on your behalf and, on the day of closing, you will be credited for this amount (in other words, this amount will be deducted from the purchase price, when calculating the amount you are required to give the vendor to purchase the property).
The down payment is something different altogether. The down payment is a percentage of the purchase price. If you are getting a CMHC-insured mortgage, you will be required to provide a down payment of 5% of the purchase price of the property. This is called a “high ratio mortgage”. You will obtain financing for the additional 95% of the purchase price, plus the CMHC high ratio mortgage insurance fee. For example, if you are purchasing a property and the purchase price is $400,000.00, you will be required to provide a down payment in the amount of $20,000.00* (5% of the purchase price).
Selecting the Right Mortgage
Where do you start?
Here are the basics to a Mortgage in Canada.
Conventional or High Ratio Mortgage? The amount of your down payment will determine if you will have a conventional (uninsured) or high ratio (insured) mortgage. It is possible to buy a home with as little as 5% down. Conventional Mortgage. Your down payment is greater than or equal to 20% of the purchase price and your mortgage does not need to be insured. High Ratio Mortgage. Your down payment is less than 20% of the purchase price and your mortgage must be insured. An insurance premium will apply. Few people have a 20% down payment available to them at the time of purchase. Regardless of your situation, a qualified mortgage professional is happy to discuss mortgage options to help meet your unique needs.
Fixed or Variable Mortgage?
The chart below explains how you could benefit from a fixed rate mortgage or a variable rate mortgage.
Fixed: An interest rate that does not change during the term of the mortgage. You can take advantage of a locked-in interest rate for the entire term and expect the same payment amount, which will be set up front. You will have the security of knowing exactly how much your payments are and how much of your mortgage will be paid off at the end of your term.
Variable: An interest rate that will fluctuate in accordance with the lender’s prime rate during the mortgage term. The principal portion of your payment is affected by the lender’s prime rate. If rates go down, a larger portion of your payment goes towards principal, helping you pay off your mortgage faster.