What You Need To Know About Mortgage Down Payments

One of the most important parts of your home purchase is your down payment. Whether you diligently save for a few years, borrow money from family, or use your RRSP, maximizing your down payment will save you money on your mortgage and give you more choice.

Here’s everything you need to know about mortgage down payments in Canada, and how the size of your down payment affects your mortgage.

What is a down payment?

A down payment is the amount of money you pay upfront when you buy a home. It’s generally a small part of the overall purchase price. In Canada, 10 to 20 per cent is typical, but it can be as low as 5 per cent in some cases. The remaining amount will normally be covered by your mortgage

The larger your down payment, the less you’ll need to borrow, which will result in significant savings. Besides the savings, a larger down payment will also increase your overall affordability.

Minimum down payment requirements in Canada

Minimum down payment rules aim to reduce the number of high-risk mortgages in the market, where people have borrowed more than they can repay.

In Canada, the minimum down payment required is determined by your home’s purchase price:

Here’s an example of how you would calculate the minimum down payment for a home with a purchase price of $700,000:

Step 1: Calculate 5 per cent of the first $500,000:  $500,000 multiplied by 5% = $25,000

Step 2: Calculate 10 per cent of the remaining portion: ($700,000 minus $500,000) multiplied by 10% = $20,000

Step 3: Add the two numbers together:  $25,000 plus $20,000 = $45,000

So on a $700,000 home, the minimum down payment is $45,000.

5 reasons why your down payment matters

Your down payment greatly affects your mortgage and overall home purchase. Here are the five biggest reasons why:

The home you can afford: Because of the minimum down payment rules, the amount of money you have available for a down payment can limit the maximum purchase price you can afford. If you only have $10,000 saved for your down payment, the maximum home you can afford will be $200,000. With a larger down payment, you would be able to afford a home that costs more. For example, if you had a down payment of $50,000, then you could afford a home that costs up to $750,000. Run your own numbers through a mortgage affordability calculator to see how much home your down payment amount can afford you.

Your monthly payments: A larger down payment results in a smaller mortgage amount. Since you’re borrowing less, you’ll pay less interest, and your monthly mortgage payments will be lower. Here’s an example we calculated using the Ratehub mortgage payment calculator.

Mortgage default insurance: Mortgage default insurance, also sometimes called CMHC insurance, protects your lender in case you are unable to continue making payments on your mortgage. Mortgage default insurance is mandatory on mortgages with down payments of less than 20 per cent and is added to your total mortgage amount. If you look at the table in the previous example, you can see how a down payment of at least 20 per cent saves you money on mortgage default insurance, which can amount to thousands of dollars.

Mortgage rates you can qualify for: It may sound odd, but if your down payment is 20 per cent or greater, the mortgage rates you are eligible for may be higher than it would be with a down payment of less than 20 per cent. This is because mortgages with down payments of 20 per cent or more can’t be covered by mortgage default insurance and are therefore riskier for the mortgage lender. To make up for the additional risk, lenders charge you a higher rate. Note that even with this higher rate, you’ll generally still save money with a higher down payment, because you won’t need to pay for mortgage default insurance.

Your home equity: Home equity is the amount of your home that you have already paid for and actually own, calculated as the value of your home minus your remaining mortgage balance. If your home is worth $800,000 and you have a remaining mortgage balance of $500,000 on it, then you have $300,000 in home equity. More home equity gives you access to more affordable credit through a home equity line of credit (HELOC), and more flexibility if you refinance your mortgage. A large down payment starts you off with more home equity, so you’ll get these perks sooner.

How to fund your mortgage down payment

There are a few ways you can fund your down payment. Here are some of the most common options:

Saving for your down payment: The traditional way to fund a down payment is with your savings. Most people will spend at least a few years diligently making deposits into a savings account or GIC, in order to have their down payment ready to go when they are ready to buy a property. If you want to save up for your down payment, it’s best to have a clear goal of the amount you want, so that you can set aside a specific portion of your income each month. To help you save up faster, you could consider putting off your retirement savings, instead setting aside that amount for your down payment.

The Home Buyers’ Plan: The Home Buyers’ Plan (HBP) lets you use money from your RRSP as a down payment. The HBP lets you withdraw a maximum of $35,000 from your RRSP to put toward your down payment. Your RRSP savings are tax deferred, and the HBP keeps any funds you withdraw tax-deferred for the duration of the program. You need to repay the funds into your RRSP within 15 years — the CRA will set minimum repayments that you need to make each year. If you don’t make your annual repayments, it will be added to your taxable income for that year (as RRSP income) and you’ll need to pay tax on it.

The “bank of mom and dad”: If your family is in a position to offer you assistance, a financial gift is a great way to increase the size of your down payment. This isn’t an option available to everyone, but it’s an increasingly popular way for young Canadians to fund their down payment. Some lenders need you to prove that any gift funds are non-repayable, so be sure to check the details with your mortgage provider if you’re considering this option.

The bottom line

Your down payment is an important part of your home purchase, making a big impact on the overall cost of your mortgage. Rules like the minimum down payment amount may seem to limit your options, but they’re in place to protect you.

If you’re able to afford a down payment of 20 per cent or more, this will save you the most money over the long term, even though it may prevent you from getting the lowest rates in the market. Down payments under 20 per cent will allow you to qualify for the lowest rates in the market, but they may cost you more overall and limit your affordability.

It’s always a good idea to speak to a mortgage professional such as a mortgage broker, who can give you expert, personalized advice on your mortgage options and help guide you through the entire mortgage process.