Realty Times May 6, 2003

Canadians: Five Percent Will Buy You a Home!
by PJ Wade

Record numbers of Canadian home buyers financed their way into home ownership in 2002, a trend that continues in many markets. The volume of Canadian residential mortgages increased 7.2 per cent in 2002, up from 4.2 per cent in 2001, according to Ali Manouchehri, Senior Economist with Canada Mortgage and Housing Corporation's (CMHC) Market Analysis Centre.

Low mortgage rates, robust employment and income growth, and weak equity markets are credited with fueling the remarkable performance of housing and mortgage markets in 2002, a trend many experts see continuing in 2003.

If you'd like to buy a house, condominium unit or townhome, but lack the up-front cash for the down payment, the federal government may be able to help you out. Our national housing agency, CMHC has pioneered mortgage insurance products and services that have helped finance more than one-third of Canadian homes.

The hardest part of buying a home — especially your first one — is usually saving the necessary down payment. By providing Mortgage Loan Insurance to lenders, CMHC enables you to finance up to 95% of the purchase price of a home. This means you can buy a property with as little as 5% down. So if the cost is $125,000, you would need a down payment of just $6,250!

If you have less than 25% of the purchase price to put down, you'll have to purchase mortgage insurance through your lender to finalize financing. Mortgage insurance protects your lender against payment default. If you, the borrower, fail to make mortgage payments (default on the mortgage), the lender is paid back by the insurer. (It should be noted that the protection provided to the lender by the insurer does not relieve the borrower of obligations under the mortgage contract.)

Without the risk of losing their money, lenders have the confidence to make mortgage loans up to 95% of the purchase price of the home. Depending on the location within Canada, maximum house price ceilings of $125,000 to $300,000 apply for 5% down payment. Ask your local mortgage lender for the maximum price ceiling that applies in your area. (Note: When the down payment is 10% or more, maximum price ceiling limits do not apply.)

How do you qualify for 5% down?

  • Purchase a Canadian house, condominium or townhome to occupy as your principal residence that meets the local price maximums.

  • Have a down payment of at least 5% of the purchase price of the property (7.5% for two-unit properties). Gift down payments from an immediate relative are acceptable.

  • Pay closing costs equivalent to at least 1.5% of the purchase price.

  • Ensure your home-related expenses like property taxes, heating, condominium fees (50%) and mortgage interest do not exceed 32% of your gross household income, that is, your Gross Debt Service (GDS) is less than 32%.

  • Determine if your total monthly debt load (excluding insurance premiums) is less than 40% of your gross monthly household income, that is, your Total Debt Service (TDS) is less than 40%.
    DO IT! - Calculate your GDS and TDS as a rough guide.

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