If you want to purchase a home in Canada, you do not have to pay for the property upfront. A downpayment is all you need then you repay the balance in installments. Simply put, a mortgage downpayment is an amount you pay upfront before you buy the home. It is usually expressed as a percentage, and it is calculated by dividing the dollar value of the down payment by the price of the home.
What is the minimum down payment required in Canada?
In Canada, homes have different prices, so the minimum down payment depends on the price of the home you want to buy.
If the property you want to buy costs less than $500,000, you are expected to make a down payment of 5%.
If the home costs you between $500,000 and $999,999, you are expected to pay 5% of the first $500,000 and then 10% of any amount over $500,000. In effect, if you are buying a house that costs $900,000, the minimum down payment is $65,000.
If you are buying a property with a purchase price of $1,000,000 or more the minimum down payment for this category is 20%.
When you take out a mortgage, the lender takes a risk on your behalf. To protect the lender in case you default, you are required to take mortgage default insurance. This is also called the CMHC, and it is required on all mortgages with a down payment of less than 20%.
According to official figures from TD Canada Trust Home Buyers Report, about 30% of homebuyers aim for a down payment of at least 20%.
The size of your down payment is important because it has an impact on three other factors. These are:
- The price of the home you can afford
- The size of the mortgage and your monthly or quarterly payment
- The value and the amount of the CMHC insurance you pay.
1. Your down payment influences the home price you can afford
In Canada, the minimum down payment is 5%, so this benchmark is used to calculate what you can afford. In effect, you can guess your maximum purchase price based on the amount you can put up as down payment. Note that the down payment is a sliding scale, so the calculation depends whether the down payment you have made is more or less than $25,000. Now, let us look at some numbers to make things clearer.
If you have saved up $25,000 and you want to buy a home, the maximum home price you can afford would be $500,000. That is $25,000 /5=$500,000.
If your down payment is above $25,000, things get more complicated. For instance, you have saved $40,000, and you want to make a down payment with this amount. In this case, the maximum home price for you would be $650,000. That is: $40,000-$25,000=$15,000 /10%=$150,000+$500,000 =$600,000.
Of course, your affordability goes with your income and your debt level. For a more detailed analysis of this and other factors, you should consult a mortgage expert or visit our mortgage affordability calculator.
2. Your down payment affects the size of your mortgage and monthly payment
If you make a relatively large down payment, your monthly payment will be lower, and the interest rate over the life of the mortgage will be lower.
3. Your down payment determines the amount of CMHC insurance you pay
This is easy to understand. If you increase your down payment, your CMHC insurance premium gets smaller because it is calculated as a percentage of your total mortgage amount. If you need information about how the process works, just visit our insurance page.
Down Payment (% of Home Price)
5% – 9.99% 10% – 14.99% 15%-19.99% 20% or higher
4.00% 3.10% 2.80% 0.00%
Example to illustrate the effect of two different down payments
Now, let us assume you want to buy a home priced at $300,000. The interest rate is 3.00%, and the amortization is 25 years. You are not sure whether you should make a down payment of $25,000 or $40,000. Below is the long-term difference between a down payment of $25,000 and $40,000.
If you opt for a down payment of $40,000, the additional $15,000 will save you approximately $25,000 in interest rate over the life of the mortgage. Also, it also lowers your CMHC insurance payment by about $2,423. Of course, it pays to look at the big picture here. That additional $15,000 can be invested in stocks, bonds, mutual funds or precious metals. The smart move is to look at all the pros and cons then make an informed decision.
Mortgage down payment sources
Some of the best sources of capital for the mortgage down payment are accumulated savings, stocks, personal property or assistance from family and close relations. You can also raise the money from your Registered Retirement Savings Plan (RRSP) Home Buyer’s Plan. In fact, you can get up to $25,000 tax-free if you take this option.
Other non-traditional sources are borrowed funds and cash gifts from non-immediate family members. Note that if you get your down payment money from non-traditional sources, the CMHC will charge you an additional 0.15% if your down payment is less than 5%.