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The 5% Down Payment Solution

Written by Posted On Tuesday, 04 May 1999 00:00

Do you want to buy a home, but hesitate because you don't have much cash for a down payment? Are you earning a good salary but feel too impatient to spend years saving up to buy?

Nearly three-quarters of the more than 610,000 Canadians who bought their first home by March 1998 could not have done so if it hadn't been for the 5% down program, according to Canada Mortgage and Housing Corporation (CMHC), the federal housing agency.

This "buy-now-pay-later" plan has made home ownership a practical alternative for many Canadian tenants. With interest rates at historic lows, mortgage payments are equivalent to, or less than, paying rent in many parts of Canada [insert dash instead hyphen]- and you usually get more living space for your money, too.

"We will be better off now than when we were renting. We won't keep lining someone else's pocket. It goes for us," said Ron McDuffee who recently used the 5% down program to buy a home in a Winnipeg suburb with his partner Jennifer. "The mortgage payments are going to be half what our rent was, including taxes."

Mortgages for more than 75 percent of the sale price legally require mortgage insurance to protect lenders should the borrower fail to repay the mortgage debt. CMHC and private insurer GE Capital Mortgage Insurance Canada are the only two suppliers of mortgage insurance. From a consumer point of view, their 5% down programs are similar and the premiums identical.

Borrowers pay the one-time premium when the mortgage is set up. Most buyers add the premium to the mortgage balance and save their cash for closing and moving expenses. Premiums are based on the size of the mortgage as a percentage of the sale price. For instance, with 5% down payment and 95% financing, the premium is 3.75% of the entire mortgage balance while financing up to 90% carries a premium rate of 2.5%.

"(The 5% down program) is definitely a good deal for people. It sure beats trying to get 10 % when you are struggling to get by," said Mr. McDuffee, a heavy-equipment mechanic. "We paid our 5% down which results in a larger mortgage. And we had to buy insurance from CMHC but given that was all we could afford to come up with, it just seemed to be the best way to do it. Better than paying [rent] on something you don't own."

There is a limit to the 5% program though. In greater Toronto and Vancouver, the maximum house price is set at $250,000. In sixteen other cities, the upper limit is set at $175,000, while elsewhere in Canada 95% financing is only available for homes less than $125,000.

For more on the "5% down" solution, talk to your local REALTOR® or mortgage lender.

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