Your Guide To Mortgage Down Payments In Canada

If you’re buying a home in Canada, you’ll need to save up some cash to put down in the form of a down payment. Given the high cost of homes in various markets across Canada, your down payment will likely be a sizable amount, so make sure you give yourself enough time to save up for this sum of money before you start the search for a new home.

Let’s go over down payments in more detail to help you prepare for the mortgage process. 

What Is A Down Payment?

A down payment is a lump sum of money that goes towards the purchase price of a home and is typically required to secure a mortgage. The exact amount of a down payment can range from anywhere between 5% to 20% or more and is based on several factors, including:

• The price of the home
• The lender
• The type of mortgage
• The type of property
• The borrower’s credit and financial profile 

Down Payment Vs. Home Deposit

There is often some confusion between a down payment and a home deposit. While some buyers may assume that they are the same thing, they are, in fact, different.

What Is A Home Deposit

A home deposit is a sum of money paid upfront at the time of a home offer and serves as an indication to the seller that the buyer is serious about the transaction and has the financial means to carry out the process. 

Difference Between A Home Deposit And Down Payment

The deposit amount will eventually go towards the down payment. While both sums of money will count towards the purchase price of the home, they serve different purposes. The home deposit is something that the seller is required to ensure the buyer is serious about the deal, and the down payment is required by the lender to complete the mortgage approval process. 

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What Is The Minimum Down Payment Required For A Mortgage In Canada? 

The minimum down payment amount in Canada is 5% when the purchase price of the home is $500,000 or less. For properties that are over $500,000, the minimum down payment amount takes a tiered approach, as follows:

Mortgage Default Insurance And Down Payments

The down payment amount you make will determine whether or not you’ll be required to pay mortgage default insurance, which is an additional payment on top of your mortgage payments. 

What Is Mortgage Default Insurance? 

Mortgage default insurance is a specific type of coverage meant to protect lenders in case a borrower defaults on their mortgage. When your down payment is less than 20% of the purchase price of the home, you’ll be subject to mortgage default insurance. 

Why Do Lenders Require Mortgage Default Insurance? 

When the loan-to-value ratio (LTV) of a mortgage is very high, the risk is also high for the lender. A higher loan amount means you have less equity in the home, which puts both you and the lender at risk. 

For example, if you happen to default on your mortgage the lender will repossess the home and sell it to recoup their losses. But if the home sells for less than what the lender loaned out, the insurer will compensate the lender accordingly for any shortfalls.  

How Much CMHC Mortgage Default Insurance Do You Need To Pay?

The Canada Mortgage Housing Corporation (CMHC) is the national housing agency of Canada and provides mortgage default insurance policies. 

The CMHC insurance premium charged is based on a percentage of the loan and the size of the down payment. The higher the loan-to-value ratio, the higher percentage you’ll be charged in insurance premiums:

Find out if you can avoid paying the CMHC Fees?

How Your Down Payment Affects The Total Cost Of Your Mortgage?

The bigger your down payment, the lower the loan you’ll need to take out. That also means lower mortgage payments and more equity in your home. 

To illustrate how the down payment amount affects the total cost of your mortgage, let’s assume the following:

• Home price of $450,000
• 25-year fixed-rate mortgage
• 5-year term
• 3.5% interest rate

Putting less toward your home purchase will not only mean more money owed on your loan, but it will also mean higher mortgage default insurance costs and higher monthly payments.

Should You Make A Higher Or Lower Down Payment?

There are pros and cons to both high and low down payments. Be sure to weigh them before you decide how much to put down upfront when taking out a mortgage.

Pros Of Lower Down Payment 

• Lower interest rate. A lower loan amount means you’ll need mortgage default insurance. This reduces the risk for the lender, who may then pass some of these savings onto you with a lower rate.
• Money can be spent or invested elsewhere. A lower down payment means you won’t have to tie up all your money into your house, leaving more funds available to be used or invested in other things. 
• More affordable. It’s a lot easier to come up with a smaller down payment, making homeownership more attainable sooner rather than later.

Cons Of Lower Down Payment

• Larger mortgage. A lower down payment means you’ll need to take out a bigger loan, which means you’ll owe more.
• Mortgage default insurance. If you make a down payment less than 20% of the purchase price, you’ll be slapped with a few extra thousand dollars to pay in the form of insurance premiums. 
• Higher monthly payment. A higher loan amount means higher mortgage payments as you work towards paying off what you owe. 

Pros Of A High Down Payment

• Lower (or no) mortgage default insurance. If you can muster up at least 20% for a down payment, you can avoid mortgage default insurance, which can translate into thousands of dollars in savings. 
• Lower monthly payment. While you might have to put forth a larger chunk of money upfront with a big down payment, you’ll benefit from smaller monthly payments as a result. 
• More equity in your home. Putting more towards the purchase price of your home upfront means you’ll have a much higher stake in your home in the form of higher equity. 

Cons Of A High Down Payment

• Bigger hit to your savings. It takes a long time to save up for a down payment, and once you spend it all on a down payment, you’ll be left with little else in your savings account.
• Money tied to an asset. Your home is a valuable asset that will grow in value over time. But throwing all your money into your home means much of your capital will be tied to that one asset, leaving little left over to invest elsewhere.
• Takes longer to save. The bigger the down payment, the longer it will take for you to save up for it. 

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Where Can You Source A Down Payment? 

Besides taking the time to put a few dollars away every month to save up for a down payment, there are other ways to source these funds:

RRSPs. You can tap into your RRSP if you’re a first-time homebuyer. The RRSP Home Buyers’ Plan allows buyers to withdraw funds tax-free, though the borrowed funds must be repaid within 15 years. 

Line of credit. If you have a line of credit, you can use that available credit to put towards your down payment. 

Proceeds from the sale of a property. If you already own a piece of property and have intentions to sell it, you can use the proceeds of the sale to be put towards the purchase of another property. 

Monetary gift. You can use money given to you as a gift from your parents or other immediate family members. You’ll need to show the lender a gift letter that stipulates that the money is not a loan that will have to be paid back. 

Down Payment Assistance In Canada

Some provincial governments offer financial assistance to first-time buyers in the form of income tax credits, land transfer tax rebates, and even cash payments. In addition to the federal First-Time Home Buyers’ Tax Credit, provincial and municipal programs may also be available. 

The following chart displays some of the provincial down payment assistance programs available to eligible borrowers:

Other Government Programs To Help You Purchase A Home 

The federal government has a couple of down payment assistance programs to offer:

Home Buyers’ Plan (HBP) 

First-time homebuyers may be eligible for the Home Buyers’ Plan (HBP), which allows up to $35,000 to be withdrawn from an RRSP account, tax-free. You must repay the funds within 15 years after withdrawal. 

Keep in mind that if you fail to repay the funds, you’ll be stuck with excess income taxes owed and could lose out on growing your RRSPs. 

First-Time Home Buyer Incentive

First-time home buyers may also qualify for a shared equity mortgage with the Government of Canada without interest. You’ll receive 5% of the purchase price of a home, or 5% to 10% of the purchase price of a new home. The funds must be repaid after 25 years or when you sell the home. 

Can You Get A No Down Payment Mortgage In Canada?

The government of Canada got rid of zero down payment mortgages over a decade ago, but it may still be possible for you to secure financing with no down payment by borrowing the minimum down payment. You can use your credit card or line of credit to borrow the minimum down payment for the mortgage you’re applying for. 

That said, a zero-down payment mortgage is probably not a good idea, as they’re much riskier and will leave with no equity and a ton of interest.

Requirements To Get A Zero-Down Payment Mortgage

If you do decide to go for a zero down payment mortgage, there are a few ways to go about obtaining one:

• Make sure you have a very good credit score to boost your odds of loan approval 
• Have a healthy and stable income
• Keep your debt load as low as possible

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Final Thoughts

Unless you can swing a zero down payment mortgage, a down payment is a requirement for just about all home loans in Canada. And while you may be able to put down as little as 5%, a higher down payment amount is always best to reduce your overall debt, keep your monthly mortgage payments low, and ensure more equity in the home you purchase.