5% or 20% Downpayment? Which must I do?

Question

Hey guys,

Question: I want to buy a duplex in Ontario. I'm thinking of purchasing it in my personal name and live there so I can put down only 5%. I really don't want to have to live there thought, I rather just rent both units, is there a way around this? Can I put a 5%

downpayment and not live in the duplex?

Roy N. · Answer

@Neil Da Silva

If you read the rules around CMHC {or privately} insured, high-ratio mortgages, you will see that they are for owner-occupied properties and that there is a certain window within which you are to take-up residency in the property.

If you secure such a high-ratio, mortgage and do not take-up residency - and never had the intention of taking-up residency - you will have committed mortgage fraud.   Whether the lender or insurer actually follow-on and "catch" you is another matter, but the possibility of unpleasant consequences is there.

Another thing to consider is that you may only hold a single CMHC insured high-ration residential mortgage at a time.  If you apply and secure one for this property, you are technically ineligible for another secured mortgage until the first property has been sold or re-financed under a conventional mortgage.

Neil Da Silva · Answer

great information, thanks very much.

Roy N. · Answer

@Neil Da Silva

In theory ... as long as your lender plays along.

Neil Da Silva · Answer

Great so, I won't be prohibited from obtaining further high ratio mortgages because I'll be able to port the insurance to the new financing?

Roy N. · Answer

@Neil Da Silva

At the time you purchase a future owner occupied property, you would tell your lender / mortgage broker that you have a insured high-ratio mortgage and you wish to port the insurance to your new financing.   There will be a fee and maybe a premium top-up depending on the new property you are acquiring.

Neil Da Silva · Answer

Thanks for the info!

With respect to porting the premium or the loan I should say, is there a specific process to do so?

Brianne H. · Answer

@Neil Da Silva what is it that you'd like to do with this property? How long do you intend to have it? What are your plans for where you will live for the next 5-10 years?

That CMHC/Genworth premium is a lot of money. And as mentioned above, you are paying interest on it. However if it's the difference between being able to buy a property and putting 5% and paying the premium, or having to save save save for 20% down, I'd pay the premium. But I don't know your circumstances.

I'm not sure how CMHC/Genworth look at it if you are living in the property, but at a later time decide to move out. Since you did reside in it, and it was owner occupied at the time of getting the mortgage, how much do they care after that? I don't know, might be something to look into. Also remember the premiums are portable if you need to port them to another property. 3 years ago we bought a townhouse as our first house, and ended up doing a live-in/house hack flip that wasn't really intended when we bought it. We only had 5% to put down, so we paid the Genworth premium (the % rate was slightly lower at the time). We were able to port it to our second and third properties (that we were living in while flipping) and only paid a smaller top-up amount, which allowed us to still only put 5-10% down on each property and keep more cash available for renos and other things.

Neil Da Silva · Answer

Makes sense! I definitely do not want to commit mortgage fraud nor do I want unnecessary complications!

Thanks for your input!

Roy N. · Answer

@Neil Da Silva

Once you have settled the matter of potential mortgage fraud, it becomes strictly a mathematical question ;-)

With a 5% downpayment you will be paying an insurance rate premium of 4.00% of the loan value (it will be added to the principal of your mortgage, so you will pay interest on top of it).

If your rate of return is better with the 5% down payment than a 20% down payment, then it's the right move.   If you cannot afford to make a 20% downpayment or you need to save capital for rehab or another deal, then making a downpayment of 5% (or 10% ... which would be an insurance premium of 3.10%) may be necessary.

Neil Da Silva · Answer

Okay gotcha!

Do you think it's best for me to obtain a mortgage with 20 down to avoid the insurance?

5% or 20% Downpayment? Which must I do?

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