As of Dec. 15, homeseekers are now able to provide a down payment of less than 20% on homes priced up to $1.5 million, because mortgage insurance is available.
Considering that the median list price in Vancouver is around $1.6 million, and hovers near $1 million for the whole province, many homeseekers may end up in this situation.
Here’s what that means for your financing situation.
How much is a down payment on a $1-million home?
Legally, down payments in Canada break down like this:
- A down payment must be at least 5% of the total if the purchase price is less than $500,000.
- If the purchase price is between $500,000 and $1.5 million, the down payment is 5% of the first $500,000 plus 10% of the amount over $500,000.
- If the purchase price is $1.5 million or more, the down payment must be at least 20%. A down payment must be at least 5% of the total if the purchase price is less than $500,000.
Doing some quick math, 20% of $1.5 million is $300,000. There are also other fees and payments, including closing costs and land transfers, involved when buying a home, so the total savings you need will be more than this.
How much is a down payment on a $1.5-million home?
After the rule change, buyers can get insurance on homes up to $1.5 million, which allows for a smaller down payment. The Canada Mortgage and Housing Corporation (CMHC) does not provide insurance on loans for $1.5 million or more. That’s because no insurance is required if you make a down payment of 20% or more, and you must do that if your loan is $1.5 million or more. Therefore, you can offer a smaller down payment on all properties less than $1.5 million.
What income do I need to afford a $1.5-million home?
To help determine if you qualify for a loan, banks and other lenders use two formulas. The first is the gross debt service ratio (GDS) and the second is the total debt service (TDS) ratio. For these calculations, you’ll need to know the average annual heating costs for the property you’re interested in. You should ask the listing agent, your buyer’s agent or the seller what the average heating costs are. If it’s a newly built home or you can’t find out, use a reasonable estimate based on similar nearby properties.
Note that when making these calculations, 100% of the rental income from a secondary suite on a two-unit, owner-occupied property can count toward your income. For other kinds of rental arrangements, 50% of gross rental income counts toward your income.
Here’s how each is calculated:
GDS = (Principal + interest + taxes + heat + 50% of condo fees (if applicable)) + 100% of leasehold rent (if applicable)) / gross annual income
Your GDS should be less than 32%.
For your TDS, use the following formula:
TDS = (Principal + interest + taxes + heat + other debt obligations + 50% of condo fees (if applicable) + 100% of leasehold rent (if applicable)) / gross annual income
“Other debt obligations” could include your credit card debt, car payments or anything else you owe. Your TDS should be less than 40%.
The average annual income needed to satisfy these requirements in Vancouver and most of the Lower Mainland for a $1.5-million home hovers at around $270,000. But remember this is the bare minimum, and doesn't include other expenses nor account for any breathing room for financial emergencies.
REW’s mortgage calculator can help you determine what your monthly payments may look like and speaking with a mortgage specialist will let you plan your finances accordingly.
A $1.5-million mortgage might seem like a lot, but in B.C.’s housing market, you may need one. Knowing how much monthly income you’ll require and the amount you’ll have to set aside for a down payment are vital to understanding if you can afford to buy a home at this price.
