The Art and Science of Down Payments

Ready to take the plunge into real estate but feel daunted by the down payment? 

In this episode, Nicole breaks down the art and science behind securing a down payment for your dream home. 

From understanding market trends and interest rates to exploring creative savings strategies and government programs, Nicole equips you with all the tools you need to be prepared and confident in your real estate journey. 

Nicole shares how to align your financial habits with your real estate goals and build the right team to guide you through the process.

Listen For:
02:52 - Down Payment Basics: What You Need to Know
16:24 - GTA Real Estate Trends and Market Forecast
19:12 - Strategies for Saving a Down Payment
28:07 - The Value of a Mortgage Broker in Your Real Estate Journey 

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Contact Nicole Lopez
Real Estate Agent
Royal LePage Credit Valley Real Estate, Brokerage
Email | Website 

Transcript

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Nicole Lopez (00:01):

I think I caught the travel bug when I was a kid. My family went on many outings and I was always up for going on a trip, whether it be on foot, by bicycle, in a car, on a plane, even better, or even visiting others when they got back from a trip. That was exciting for me. For me, visiting was like show and tell. I would sit quietly, discreetly listening, soaking it all in. It was vicariously traveling with them. I was mesmerized by the stories friends or family members would tell us, and I would make mental notes to myself for maybe one day when I would get to visit this far away or maybe not so far away place. My goal out of post-secondary school besides landing a decent job, was to start saving, to travel, to eat in nice restaurants, to invest in real estate and everything else.

(01:16):

At the time it seemed like an impossible task. Fast forward to my first job. It was a start. I had money in my pocket, well, maybe not so much of it, and I could do stuff like travel, eat out, have fun with friends, et cetera. And I did do it well, it didn't last long. I quickly found that my bank account was a little bit me meager or lacking at least to how I felt comfortable, and I did have the dreams of real estate. So what now? Hi everyone. Welcome back to another episode of Real Estate with Nicole. Today we're diving into the topic of real estate down payment, the art and science of it to be exact. My motto is to know more, be prepared, be confident. This episode is highly focused on the Be Prepared component, so grab a cup of your favorite beverage and settle in.

(02:52):

Alright. All right, so let's get started with some of the basics. Down payment. I know it seems simple, but down payment is the amount of money you put towards the purchase of a home. Your lender deducts the down payment from the purchase price of your home and your mortgage covers the rest of the price of the home. Down payment is typically a percentage of the home's total purchase price and is paid out of pocket at the closing of the purchase. In Ontario, the standard Dow payment varies often between 5%, 20% or even more than 20% of the home's price depending on your particular situation. For example, the minimum down payment needed depends on the purchase price of the home, as I mentioned. So for homes costing up to $500,000, the minimum down payment in Canada is 5%. For homes priced between 500,000 and a million dollars, the minimum is 5% of the first $500,000 and 10% for any amount above 500,000.

(04:23):

For homes that are priced over a million dollars, a 20% down payment is needed. A couple of notes for you to keep in mind though. If you are self-employed and have a poor credit history, your lender may require a larger down payment. And if your down payment is less than 20% of the purchase price of your home, you'll typically need to purchase what's called mortgage loan insurance. So mortgage loan insurance, what is it? It's an insurance that protects the mortgage lender. So the financial institution or the lender that is providing you the funds for your mortgage, they require this insurance as it protects them. In case you are unable to make your mortgage payments, it doesn't protect you. Mortgage loan insurance is sometimes also called mortgage default insurance. Your lender may require that you get mortgage loan insurance even if you have 20% down payment or more. And again, this is usually in the case if you are self-employed or have poor credit history. But as I mentioned, each individual's case is unique and it would be determined on a case by case basis.

(06:04):

Mortgage loan insurance isn't available if the purchase price of the home is $1 million or more or the loan doesn't meet mortgage insurance company standards. So your lender, so the financial institution or the organization that is lending you the funds for your mortgage, they will typically coordinate getting mortgage loan insurance on your behalf if it is required and needed. One more note, there is a fee associated with the mortgage loan insurance, and this is called a premium. The mortgage loan insurance premiums range from 0.6% to 4.5% of your mortgage and your premium depends on the amount of your down payment. The larger your down payment, the less you would need to pay for mortgage loan insurance premiums. And for your information, there are three main providers of a mortgage loan insurance in Canada. They are the Canadian Mortgage Housing Corporation or CMHC, Sagan and the Canadian Guarantee Mortgage Insurance Company.

(07:25):

So that's kind of the nuts and bolts with the basics related to a down payment. Now I want to talk a little bit about understanding the market, providing you with a high level overview of the real estate market and a couple of terms that I think are important for you to understand. You may have heard of the term buyer's market and seller's market. So here's what they mean and more importantly, what they mean to you as a buyer. A buyer'ss market is one where the supply of homes exceeds the demand. So basically there are more homes for sale on the market than the buyers that are available to buy them. And since supply is greater than demand, properties typically stay on market longer, and this will give you as a buyer enough time to explore a few options, perhaps even visit the properties a few times before submitting an offer.

(08:35):

In a genuine buyer's market, it means you can usually negotiate the asking price down as multiple offers on a property tend to be rare in a buyer's market. As I mentioned before, the seller's market, a seller's market is one in which the of homes cannot keep up with the demand. So basically a lot of buyers with very few homes for sale, this huge demand tends to push prices upwards, and you can expect potential bidding wars with other interested buyers. This means you may pay more than the asking price or the listed property price. You'll have to decide to submit the offer probably more quickly as properties often stay on the market in just a few days. And this scenario was what we saw a few years ago where properties were coming on the market, you had people lining up to go and see the homes and then bidding wars happening and homes selling within days of coming onto the market.

(09:49):

So those are the two key factors that I think are important for you to understand in terms of terminology. So another key item related to down payment and the market are understanding the impact of mortgage rates on property prices. So another factor that you need to understand with regards to down payments is understanding the impact of mortgage rates on property prices. So we saw interest rates rise steadily from 2022, late 2022 into 2023 with a recent drop of 50 basis points just in the last month. During this period, we saw a cooling of the market activity as many potential buyers move to the sidelines. One because the rising interest rates and two, because they were no longer able to qualify or afford purchasing a home at the current interest rates. So as you can see, as the interest rates rose, there were less buyers able to be on the market to purchase properties.

(11:08):

And as we are currently seeing, there are more and more homes coming onto the market in this period. So we're in a kind of situation where interest rates are trending a little bit down and homes coming on the market are trending a little bit upwards. So rising interest rates, as I mentioned, can discourage potential buyers from buying properties. So they won't want to or they aren't unable to or they cannot afford to take out mortgage loans. However, the impact is much more complex and must be analyzed with several other factors in conjunction to interest rates such as population changes, population growths into specific areas. For example, the greater Toronto area has a high influx of new immigrants into the country, rent movements with the pressures of increasing prices and increasing interest rates, people are opting to rent for longer. So there's pressures on with the limited amount of rentals.

(12:17):

So rentals are also going up during this time period. The basic economics of the area, the country in terms of employment rates, in terms of inflation, those are factors that strongly impact interest rates. And the number of new housing developments is another factor to be put or thought about in consideration with regards to the impact of mortgage rates on property prices, generally, most buyers will simply have to settle for lower approval amounts, meaning they'll look for more affordable housing solutions, so they'll purchase maybe a semi detached instead of a detached house or look for properties in more affordable areas. So affordability becomes the critical point when dealing with down payments, interest rates and trends in the market. And this leads me to providing you with an overview of some of the key trends in the market that we've seen at the Reset Royal Page. House price survey results that were published in June.

(13:37):

As I alluded to earlier, we've seen increasing inventory, so the number of active listings, so new homes coming on the market for sale is up and it's at the highest it's been in the past 10 years. Another thing to note, the average home prices are up about 30.8% since 2019, and this is kind of a national aggregate home price. It remains well above pre pandemic levels. So just something for you to know that during that period 2020 into 2022, yes, we had limited supply, lots of demand, home prices increased because of the high demand and the bidding. One thing to keep a note that in the greater Toronto area, the market activity is slower, however, prices are not necessarily dropping or as people might have anticipated, the prices are still sticky. Another thing that we are noticing that you're probably all aware is the Bank of Canada is taking a cautious approach to lowering interest rates with controlling inflation.

(14:55):

As we get into 2024, we've also noted that rising borrowing costs, so those mortgage rates, those interest rates are also slowing new home construction. So yes, the government may have goals to have all these new housing starts, however, the cost of borrow and financing challenges that a lot of builders are facing, it's not looking like those goals for the government will be attainable based on the current activity and the financing challenges that a lot of builders are seeing. One key example to note is that this year they have been about 3,159 new condo units, and that is the lowest amount of condo units started since 1997. So that tells you across the industry, the real estate industry, these mortgage rates and financing costs are really impacting the broad scope of the industry. And one more statistic I'll leave you with is that for the GTA, the year over year aggregate price increase has been about 0.9%, which is about the average cost across all types of homes is about $1.196 million.

(16:24):

And we've seen a 1.1 increase over Q2, so between Q2 and Q1 since Q2. So we've seen an increase in prices by 1.1% and it's forecasted that there would be a 10% increase in the aggregate price in the GTA by Q4, and this is in comparison to Q4 of 2023, which was again, quite slow. So now that you've had a refresher regarding buyer's market, seller's market, recent GTA trends, and most importantly what a down payment is, let's talk about how to save for one. So your credit score determines the amount of money you can borrow, what interest rate, and how much in fees you'll have to pay. Your credit score is based on your credit report, which includes information about your credit history, your payment history, how much debt you owe, how long you've had credit for, the types of credit you have, and how often you apply for credit.

(17:44):

So all of these factors put together build a picture of you and your credit portfolio. So getting your credit score in line also works towards saving money for your down payment and closing costs. However, working on your savings is good even if you have a solid or excellent credit score. So as noted previously, a down payment is the money you pay in cash to finance your property purchase, and this amount is again deducted from the property purchase price. Your lender then issues a mortgage for the rest of the amount, so the higher the down payment, the lower your mortgage, your interest rates, and the subsequent monthly payments that you must make. So it's really critical to really save that down payment, have a really solid credit rating in order to optimize and get the best financing for your particular situation. So the probably most meaningful change you can make in your financial behavior to help improve your credit score and increase your savings is to stop buying with credit card debt.

(19:12):

If you can't afford something in cash, don't purchase it, even if it means you'll skip a vacation this year. Ouch. I know that hurts. Probably the only exception I would say is education. If you believe that a course or program can help you get a better job or a promotion, you can finance it with credit card debt. However, this will require a lot of discipline and each individual situation is unique and I would recommend you think it through carefully and perhaps consult with a financial advisor if you have one. So another effective strategy saving for a down payment is to set up a dedicated savings account specifically for your down payment. So you open a new savings account with no linking to debit cards or checks and that you can solely use for saving your down payment automatically. Putting in monthly deposits can help you stay disciplined.

(20:26):

You're paying yourself first. This means putting aside money or putting aside the amount you want to save at the beginning instead of at the end of the month after you've paid everything. So really focusing in on that goal and being laser focused on achieving it. Additionally, with automatic savings plan, you'll stop purchasing hopefully non-essential things and maintain a monthly budget. You can use a budgeting app or a simple spreadsheet to help you with your budgeting. I know this is so easy to say and much more challenging to do just from personal experience. I do want to note that in episode 17 of Real Estate with Nicole titled Breaking Barriers Women and Financial Literacy, my guest Sarah McCullough and I discussed the importance of aligning financial decisions with your personal goals. I highly recommend you listen to this episode as she provides some great nuggets of wisdom.

(21:37):

I'll drop a link in the episode for you. Another tip, you can also remove spending temptations by unsubscribing from any marketing emails you're receiving. I know it's always tempting, everything's on sale, 50% off, 40% off, but do you really need it? And instead of even asking yourself that question, remove the temptation. My golden tip, use a shopping list when you go shopping and stick to it if you have old stuff, sell it and you can organize a yard sale and you can put that money you earn toward your down payment. Those are two golden tips to help with bolstering your down payment. So my key takeaway is gain basic understanding of the real estate market and associated trends. Next, even with a reduction in non-essentials. So skipping your annual Caribbean winter vacation, it can be challenging to save enough for a down payment. So I'll pivot to discussing additional sources of down payment that you may be able to tap into.

(23:05):

So in Ontario, the government, their government programs decide to help home buyers. So one of these programs is called the Home Buyers Plan, and it allows first time home buyers to withdraw up to $60,000 of their RSPs to put towards a down payment. And this $60,000 is based on April 16th, 2024 when the government announced a change. Originally, the maximum amount that you could put away or use was $35,000 from your RSPs, and it was increased to really help first time home buyers. So $60,000. So this use of this home buyer plan is allowed provided you repay the amount within 15 years of taking out the funds to use for your down payment. It's important to familiarize yourself with this program that can significantly ease the financial burden. So if you're a person that's already, or you have the ability to contribute to a company RSP or you're doing it on your own, this is an option for you to tap in to funds to help with your down payment on your next home.

(24:31):

There's also the first home savings account, FHSA, and you may be able to save up to $40,000 tax free to buy a home, and the annual contribution limit is $8,000. So that's another option that's available to you. There are a few rebates that are also available. I'll just briefly mention them, and that's the home buyer's amount, and you could get a tax credit about up to $1,500. Then there's the G-S-T-H-S-T new housing rebate. This is a rebate that you may be able to obtain when you're buying a new home, additional your investment assets. So that could be an avenue for you to use for your down payment. Again, it would be best to consult with your financial advisor or your mortgage broker. So some thinking outside the box, or let's think creatively avenues of down payment that are becoming more and more frequent are gifts from family members.

(25:48):

If your family can help, if you receive a financial gift, it's important for you to know that it needs to be documented appropriately. And I would suggest that before, if you know you're going to be receiving such a gift consulting with your mortgage broker or lender to ensure that the financial gift will qualify and it's appropriately documented. So an example of such a financial gift and what we're seeing more of more would be a grandparent using a reversed mortgage to help their grandchild with obtaining their first home, providing them with a gift to help with down payment. Another potential option that you could consider is coying with a friend or a family member. This could help reduce the individual financial burden of coming up with the down payment, and you'd need to make sure you work through the appropriate documentation, legality speaking with your mortgage broker to make sure things are set up appropriately.

(26:53):

There are also rent to own opportunities if they exist in your area. Rent to own agreements allow you to rent a home with the option to buy later and potentially applying a part of your rent towards the purchase price. In my recent experience though, these opportunities typically exist outside the greater Toronto area, but they do exist. So it's an option for you to consider if you're outside the greater Toronto area or looking to move outside of the greater Toronto area. There are also some shared equity programs that are available on the market with specific requirements for qualification, and there's always the option of getting a side job doing some freelance work to increase your income because this extra income can potentially be dedicated entirely to your down payment fund. So with that, I think combining diligence saving, take advantage of government programs, seeking out other income sources, you can make your dream of owning real estate in Ontario a reality.

(28:07):

So my takeaway, understand the criteria, the requirements, and optimize the use of sources of a down potential down payment. This can help you in planning and for your real estate goals. So I'd like now to touch upon the value of a mortgage broker. I know we're talking about down payment, but I think the value of a mortgage an essential component. So saving and assessing other sources for a down payment are key, and it's important to start building your team. This can come at the beginning so you can be learning at the same time you're starting to build your team. So having a trusted professional, be it a real estate agent, a mortgage broker, a lawyer, it's important to build this group to help you confidently make well-informed decisions related to your real estate purchase. Here I'll highlight the mortgage broker, and I like to highlight them because they are not necessarily affiliated with a particular financial institution or lender, and they're able to see the available options across various lending institutions.

(29:32):

I believe that a mortgage broker can be an invaluable asset when you're navigating the complexities of financing a real estate purchase in the GTA and one of their primary roles is to serve as an intermediary between you and potential lenders. They have access to a wide range of mortgage products and lenders, including banks, credit unions, and private lenders, which means they can offer you a variety of financing options that you might not be able to find on your own. So by assessing your financial situation, they can recommend the best mortgage products tailored to your needs. Whether you're a first time buyer, home buyer, you're looking to refinance or investing in a property, and they're also able to help you, even if you're just starting out and you need help with improving your credit, they can give you tips. Looking at your particular financial situation, gives you tips, give you advice in terms of turning things around, improving your credit rating, and just overall putting you on the right path towards getting to that down payment and getting to your real estate investment.

(30:52):

Moreover, mortgage brokers can help you understand the fine print of different mortgage options. Make sure you ask those questions. They can explain the terms and conditions, interest rates, and repayment strategies in a way that's easy to understand. This guidance can help you make an informed decision that aligns with your long-term financial goals. Brokers can also help you in preparing and submitting your mortgage application, ensuring that all the necessary documents are included and that your application is as strong as possible, which can significantly increase your chances of approval. They help you dot your i's cross your T's. Additionally, mortgage brokers often have the negotiating power to secure better rates or terms then you might be able to obtain on your own. They can use their industry relationships and knowledge to advocate on your behalf, potentially saving you thousands of dollars over the life of your mortgage by providing continuous support throughout the entire home Buying process from first consultation to closing a mortgage broker helps ensure you secure the most favorable financing plan for your real estate purchase, even in Canada and in the GTA, using their tools, their relationships, their negotiating power to get you the best terms possible for your particular situation.

(32:32):

So building a team and including a mortgage broker in the purchase of real estate is crucial for those several reasons. First, buying real estate is complex process that involves numerous legal, financial, and logistical considerations. By assembling a team of experts, including the real estate agent, lawyer, inspector, mortgage broker, you can ensure that each aspect of the transaction is managed by someone with specialized knowledge and skills. This collaborative approach helps streamline the process, reduce the chances of errors, and ensure that all necessary steps are completed on time. So a mortgage broker plays a vital role in securing the financing necessary to complete your real estate process. Unlike a loan officer who works for a specific bank or financial institution, a mortgage broker has access to their wide network of lenders, and this allows them to shop around on your behalf and find the best mortgage rates and terms that suit your financial situation. Furthermore, a mortgage broker can give valuable advice on different loan products, help you understand the nuances of mortgage agreements, and help in gathering the necessary documentation. Their expertise can significantly enhance your chances of obtaining a favorable mortgage, saving you money over the life of your mortgage. Moreover, having a mortgage broker as part of your team can provide peace of mind. The home buying process can be stressful and overwhelming, especially for first time home buyers. And the mortgage broker not only helps navigate the financial aspects, but also offers support and guidance throughout the journey.

(34:37):

Certainly, securing a down payment for a real estate purchase is one of the most important steps in the home buying process and requires careful planning and strategy. So takeaway number three, build a team and include a trusted mortgage broker, real estate agent and add members along the way such as a real estate lawyer, home inspector, et cetera. The science related to real estate down payment are the cold numbers, your credit score or report, the amount available for down payment income interest rates, whereas the art lies in the decisions you ultimately make, the advice you receive and this experience of the mortgage broker professional who is guiding you through the process. And if you are fortunate, it could even include a helpful financial gift from a family member.

(35:45):

So back to finish off my post-secondary experience. That day when I looked at my meager bank account, the job I had and the return on investment from my spending habits, basically what I'm getting out of spending this money, I realize that my spending habits and my finances were not aligned with my personal goals. Also, the job I had at the time while comfortable and safe wasn't going to help me reach the goal I set for myself at least anytime soon, if ever. So what did I do? Okay. I have to admit it. I moped, I salt, but after that, I regrouped. And the desire to get out of my parents' basement was a really strong motivator. I made decisions about what I was able to control, decisions that aligned with my personal goals, and I realized slowly but surely, if I made a miscalculation, I would just need to readjust and keep moving forward.

(37:03):

I learned to say no, so no to what wasn't going to move me a step closer to my goals. And I was also a little bit creative. I paid off debt and avoided any new debt. So if I did use my credit card, I would pay it off right away. It's good to get those points. I worked overtime and was able to bank hours, and then once I banked enough hours, I took the rest of the funds as pay. So I would use my banked hours for vacation time and my extra overtime would pay for any trips that I would take. So I didn't use my main salary for trips, but I used any overtime that I worked to cover that. I also worked a part-time job, and I ultimately decided to contribute to an RSP, which was something that my parents advocated strongly. Ultimately, save, save, save, and really try to align your personal goals with your financial behaviors.

(38:20):

I know it seems simple, but the truth is it wasn't fun. I didn't go out as much with my friends. I was choosy about the restaurants I visited. But you know what? I really didn't sacrifice everything. It was just the extras, the wants and not the needs. And ultimately, I felt comfortable in being me and not trying to keep up with everyone, and I put off activities until I was more financially able to actually participate and feel good about it. It was a mindset shift that was hard, but worth it because you think when you're out of school, you can just live carefree when you have your first job and this money coming in, but you need to pause and think again because those decisions that you make at that time ultimately catch up to you later on. Well, that's it for today's episode of Real Estate with Nicole. I hope you found this discussion on the art and science of Down Payments informative. If you have any questions or topics you'd like me to cover in future episodes, feel free to reach out. Don't forget to subscribe so you never miss an episode. Leave a review and share the podcast with anyone who can benefit from this information. Until next time, remember to know more, be prepared, and be confident.