Loans Canada Launches Free Credit Score Portal And Is Recognized As One Of Canada’s Top Growing Companies
Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
If you plan to buy a home, odds are you’ll need a mortgage to help finance the purchase. If that’s the case, you’ll need to come up with a down payment to get approved.
But just how much do you need for a down payment? And can you get away with a small upfront amount?
Considering the cost of homes these days, your down payment will cost you tens or even hundreds of thousands of dollars, depending on the home you buy. But there are minimum amounts accepted that may help make homeownership more attainable. And it’s even possible you may even be able to secure a lower interest rate despite the lower down payment amount.
But why would you be rewarded with a lower rate if you come up with a lower down payment?
A down payment is a percentage of the price of a home that is paid upfront when a deal closes on a real estate purchase. It is required when taking out a mortgage to finance a home purchase and goes toward the purchase price of the property.
Down payments differ based on several factors, including the type of mortgage being applied for and the borrower’s financial profile and credit score. That said, in Canada, the minimum required is 5% of the purchase price for insured mortgages and 20% for uninsured.
Mortgage lenders require a down payment because it reduces their overall risk when lending large amounts of money. The bigger the down payment, the less that needs to be borrowed and the lower the risk on the part of the lender if the borrower ever defaults on the mortgage. Buyers who are able to come up with larger down payments are less likely to default on the mortgage because they have more of their own money invested in the property.
Find out the difference between a home deposit and a down payment.
While it may come as a surprise to many Canadians, there’s a reason why smaller down payments qualify for lower mortgage rates. That reason is mortgage default insurance.
Mortgage default insurance— commonly referred to as “CMHC mortgage insurance” — is a premium borrowers pay when their down payment is less than 20%. CMHC insurance can cost between 2.4% to 4% of the mortgage amount, the exact rate depends on the down payment you make. Typically, the lower your down payment the higher your CMHC cost will be.
CMHC insurance can be paid upfront in one lump sum or you can opt to pay it with your mortgage. This will allow you to pay for the premium in more affordable payments.
Mortgage default insurance is a premium you pay when your down payment is less than 20%. But what does it do? Essentially, mortgage default insurance protects the lender from borrowers who default on their mortgage.
The risk lenders take when lending money is significantly reduced when borrowers pay the mortgage default insurance premium. It basically covers lenders of any loss they may incur due to borrowers defaulting on their mortgage. For example, let’s say a borrower stops making payments and the lender is forced to seize the property and resell it to recoup the lost funds. If the lender is unable to sell the property for the amount that is still owed on the mortgage, the insurer will reimburse the lender for the loss they incur.
As such, when a mortgage is insured, lenders are able to provide the mortgage at a lower cost, which is usually shown in the form of a lower mortgage interest rate. That said, while a lower mortgage rate may lead to money saved on interest, it is often offset by the premiums paid on the mortgage default insurance.
When you apply for a mortgage with a high LTV, your lender will inform you of the exact price of the insurance policy, which is calculated as a percentage of the mortgage loan and is based on the down payment amount. The higher the LTV, the higher the insurance premiums will be, as is shown in the following table:
Loan-to-Value (LTV) Ratio | Premium on Loan Amount |
Up to and including 65% | 0.60% |
Up to and including 75% | 1.70% |
Up to and including 80% | 2.40% |
Up to and including 85% | 2.80% |
Up to and including 90% | 3.10% |
Up to and including 95% | 4.00% |
A smaller down payment might be easier to save for, but there are some downsides to it as well that you should be aware of.
The minimum down payment amount needed depends on the price of the home you intend to buy and the type of mortgage you’re applying for. Your financial profile and credit score may also impact the amount that your lender may require. However, in general, houses valued under $500,000 require at least 5% as a down payment, while houses valued at over a million require at least 20%.
Every mortgage requires a down payment in Canada. But you may still be able to get a zero down payment mortgage without coming up with the cash on your own by borrowing the minimum down payment.
With this method, you would have to use a line of credit or your credit card to borrow the funds needed for a down payment. However, this can be a risky move, as you’ll be left with high-interest debt to pay back.
The minimum credit score needed to get approved for a home loan in Canada is 640. However, you may be able to get away with a slightly lower score if you can find a lender who works with low credit borrowers.
There’s no getting around a down payment when it comes time to take out a mortgage to buy a home. But you may be able to get approved with a smaller down payment without having to get slapped with a high-interest rate. Just keep in mind all the other fees that may come with a minimum down payment amount.
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
Don’t pay until March with this offer from our partner, Fairstone.* Ends January 31st.
New Offer! Get up to $2,000 cashback + a $50 bonus on signing up. Conditions apply.
Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.
With KOHO’s prepaid card you can build a better credit score for just $10/month.
All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.
When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.
Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.