HomeUnderstanding down payments is a critical step in the home-buying journey. They can be used to help lower your mortgage payments, build equity in the home you are purchasing as well as help secure a mortgage from a lender.
What is a down payment?
A down payment is the initial amount of money that a homebuyer pays when purchasing a property. It’s typically a percentage of the home’s total purchase price. If you are looking to finance a home purchase with a mortgage you will need to provide at least the minimum down payment.
How do down payments work?
A down payment in addition to a borrowed mortgage covers the purchase cost of your home. The down payment on a house will typically be paid when the sale is complete during the closing process.
The size of your down payment can be a determining factor in approval for a mortgage. If you have poor credit or are self-employed your lender may require a larger down payment for you to be approved for a mortgage.
Mortgage loan insurance
If the down payment is below 20% you will need to purchase mortgage default insurance which protects the lender in case that the homebuyer is unable to make payments. The premiums for mortgage default insurance range from 0.6% to 4.5% of the mortgage amount and can be added onto the total of the mortgage.
Learn More: Mortgage Default (CMHC) Insurance
Minimum down payment
The minimum down payment required in Canada is based on the purchase price of the home. For homes that are less than $1 million the minimum down payment will also require the homebuyer to purchase mortgage default insurance. Once the price of a home is $1 million or more the minimum down payment required is 20% of the purchase price. This down payment percentage does not require mortgage default insurance, however it may still be favorable for mortgage default insurance to be purchased.
Canada minimum down payment chart
| Purchase Price | Minimum Down Payment Required |
|---|---|
| $500,000 or less | 5% of purchase price |
| more than $500,000 less than $1,000,000 | 5% of the purchase price for the first $500,000; 10% for the portion above $500,000 |
| $1,000,000 or more | 20% of the purchase price |
How much down payment should I have?
You may be asking if you really need a 20 percent down payment for a house? In Canada you are able to have a down payment that is less than 20 percent when purchasing a home. However, it is important to realize that a smaller down payment will require you to take on more debt which will leave you with a larger mortgage payment. We can take a look at how the size of your down payment impacts the total cost of your mortgage.
How your down payment impacts mortgage costs
Example: Let’s say you want to purchase a home in Canada for $700K with an interest rate of 5% amortized over 25 years. We can compare the total cost of your home over the life of the mortgage.
If we were to put the minimum down payment on the purchase of a $700K home it would be $45,450 as you can see with this down payment calculator. This would leave us with a mortgage of $654,550. Since the down payment is less than 20% we are required to pay $26,184 in mortgage default insurance based on this Mortgage Default (CMHC) Insurance Calculator. We can add this mortgage insurance onto the mortgage which gives us a total mortgage of $680,734. Over the 25-year amortization period we would pay $680,732 in interest for a total cost of $1,146,249.
If you were to put a 20% down payment on the purchase of a $700K home it would be $140,000 which would require you to get a mortgage of $560,000 for the remaining amount. No mortgage default insurance is required since the down payment is 20%. Over the 25-year amortization period you will pay $411,366 in interest or $971,366 in total for your mortgage. Over the period of your mortgage you will pay $269,366 less in interest which is saved from making the larger down payment.
How can you save for a down payment?
There are a few accounts that can be used in Canada to help you save for a down payment and purchase a home. The First Home Savings Account (FHSA) is a registered plan that is designed to help first-time homebuyers in Canada. You are also able to use savings from your Tax-Free Savings Account (TFSA) to help finance the purchase of a home. You can also withdraw funds from your Registered Retirements Savings Plan (RRSP) with the federal government's Home Buyer’s Plan to help finance the down payment on a home.