For many Canadians, saving up enough money for a down payment is one of the biggest challenges to achieving the dream of homeownership. With rising home prices in recent years, prospective buyers nationwide struggle to find the lump sum needed to secure a mortgage.
But what exactly is a down payment, and how much do you need to buy a house in Canada? Whether you’re just starting to save or ready to buy soon, this overview tackles all the key questions surrounding down payments for home purchases in Canada.
What is a Down Payment?
A down payment is the money a homebuyer pays upfront when purchasing a new home. It serves as a partial payment towards the property’s full purchase price. The remainder of the purchase price is financed through a mortgage loan from a bank or other lending institution.
A down payment demonstrates to the lender that the borrower is financially committed to the home purchase. A larger down payment signals lower risk for the lender, which can lead to more favourable mortgage rates and terms.
It’s important to note the difference between a down payment and a deposit. The deposit is a smaller upfront amount that the buyer pays upon offer acceptance to demonstrate serious intent to purchase. This deposit is later credited towards the total down payment due at closing.
What is a Minimum Down Payment in Canada?
These minimum down payment regulations were introduced in Canada in the 1990s as part of broader mortgage rule changes designed to promote responsible borrowing and lending. They help create a more stable housing market by ensuring homeowners have adequate home equity at the time of purchase.
The minimum down payment depends primarily on the purchase price. It varies on a scale, with the percentage increasing with higher-priced properties. On December 15, 2024, the federal government increased the $1 million price cap for insured mortgages to $1.5 million.
| Home Price | Minimum Down Payment |
|---|---|
| Under $500,000 | 5% of the purchase price |
| $500,000 – $1,500,000 | 5% on the first $500,000, 10% on the remainder |
| $1,500,000 or more | 20% of the purchase price |
While meeting the minimum legal requirements helps improve mortgage affordability, buyers who put down less than 20% may miss the advantages of a lower LTV ratio.
What are the Benefits of Larger Down Payments?
Though 5% or 10% down meets the legal minimum for most cases, putting down 20% or more provides some key benefits:
- Avoids mortgage default insurance – This high-ratio insurance is required by law for a down payment under 20%. Avoiding it saves 2.4% to 4% of the mortgage in premiums.
- Lower interest costs – The larger your down payment, the smaller your required mortgage amount will be. This results in paying less total interest over the amortization period.
- Lower monthly payments – A bigger down payment means a lower monthly principal, improving cash flow and qualification ability.
- Builds home equity faster – More equity gives financial flexibility for things like home renovations or borrowed funds in the future.
- Improved mortgage rates and terms – Lenders view higher down payments as less risky, so may offer better interest rates and mortgage terms.
Average Down Payment in Canada
The typical down payment amount in Canada is below the 20% that many assume is standard. According to a report by Realtor, the average down payment in Q1 of 2024 was 13.6%.
While having a down payment above 20% provides many benefits, there are 6 key reasons fewer Canadians are putting 20% or more down:
- Rapidly rising home prices in cities like Toronto and Vancouver have made it extremely difficult to save a 20% down payment on an average home.
- Many first-time homebuyers stretch their budgets to get into the market before being priced out completely.
- Existing homeowners trading up often rely on equity gains rather than new savings for their next down payment.
- Tying up capital that may see better returns if invested elsewhere
- Missing out on home price appreciation that could have covered the mortgage insurance premium
- Higher opportunity cost versus investing extra funds into retirement or other savings
As with any major financial decision, evaluate the pros and cons before committing to a down payment amount.
How Does Your Down Payment Affect Mortgage Costs?
The amount put down directly impacts the size of the required mortgage loan and, therefore, your overall borrowing costs. Here’s an example to illustrate:
- Purchase Price: $500,000
- Mortgage rate: 5%
- Amortization: 25 years
| Down Payment | Insurance premium | Total Mortgage | Monthly Payment |
|---|---|---|---|
| 5% ($25,000) | $19,000 | $494,000 | $2,873 |
| 10% ($50,000) | $13,950 | $463,950 | $2,698 |
| 20% ($100,000) | $0 | $400,000 | $2,326 |
As shown, the higher down payment results in substantial interest savings over the life of the mortgage and a lower LTV ratio. The buyer with 20% down pays less in interest than the buyer with a minimum of 5% down.
Aim for at least 20% down whenever possible while ensuring emergency savings remain. Keep in mind that this ties up more capital than you could potentially invest elsewhere.
Sources for Down Payment Funds
When it comes to putting together a down payment, buyers have 5 options:
- Savings – Personal savings and investments like Tax-Free Savings Accounts are the go-to source for most buyers. Consistently setting aside money well in advance is key.
- Family gifts – Receiving gift funds from immediate family members is a popular way to make up a shortfall. Lenders require a gift letter confirming the money doesn’t need to be repaid.
- Proceeds from property sale – Money left after selling a current home can go straight into the down payment on a new one.
- Borrowed funds – Personal loans or borrowed money are permitted, though they must be declared and qualification capacity reduced.
- Rent-to-own payments – Accumulated rent credits from a rent-to-own agreement can act as down payment funds for purchasing the rental property.
Down Payment Assistance for First-time Home Buyers
In addition to traditional savings, the government offers some programs to help first-time home buyers come up with a down payment:
- Home Buyer’s Plan (HBP): Allows first-time buyers to borrow up to $35,000 from Registered Retirement Savings Plans RRSPs for a down payment. Repayment to your RRSP over a 15-year period is required to avoid tax penalties.
- GST/HST New Housing Rebate: This rebate returns a portion of GST or HST paid on newly constructed homes to first-time and repeat buyers. The maximum federal rebate is $6,300, with further rebates available in some provinces.
- First Home Savings Account (FHSA): This account allows first-time buyers to make tax-deductible savings of up to $8,000 annually, up to a lifetime maximum of $40,000.
How to Save for a Down Payment?
Here are 7 key strategies to begin saving and reach your goal faster:
- Make a detailed budget – Track your net monthly income and expenses. Look for areas to reduce discretionary spending and allocate those savings towards your fund.
- Pay down debts – Eliminating credit cards, loans, and other debts frees up extra cash flow that can be put toward the monthly down payment. This can also help lower your LTV ratio.
- Set up automatic transfers – Arrange for a percentage of each paycheque to be automatically transferred into a dedicated savings account.
- Contribute lump sums – Put any windfalls like tax refunds, bonuses or monetary gifts directly into your savings.
- Take advantage of first-time buyer programs – Federal and provincial first-timer incentives like the First Home Savings Account provide tax relief to accelerate your savings.
- Consider co-buying – Teaming up with a partner, family member or friend to purchase together can vastly improve your combined down payment capital.
- Give yourself time – Start saving immediately and give yourself several years to accumulate funds. Avoid raiding retirement savings if possible.
Mortgage Down Payment in Canada FAQs
How do you determine if you are ready financially for a down payment?
Look at your income, budget, debts, and timeline. Ensure you have enough cash savings plus an emergency fund of 3-6 months of expenses.
Can you buy a house in Canada with no down payment?
Technically, yes, through alternative lenders, but the rates and requirements are much less favorable. The legal minimum with a standard mortgage is 5% down.
How do you calculate the loan-to-value ratio using the down payment?
Divide the mortgage amount by the total home value. For example, for a $100,000 home with a $20,000 down payment, the LTV ratio is $80,000 mortgage/$100,000 value = 80% LTV.
What sources can you use for a mortgage down payment in Canada?
Savings, RRSP under HBP plan, family gift, proceeds from a property sale, borrowed funds, rent-to-own payments, First Home Savings Account.
Can you put less than 20% down on an investment property in Canada?
Lenders typically require a minimum 20% down payment on rental/investment properties regardless of the purchase price.
How long does it take to save for a down payment on average in Canada?
Saving enough for a down payment takes 5-10 years on average for prospective buyers in Canada. Those in high-priced markets may need even longer.
What are the pros and cons of putting more than 20% down?
The pros are saving on interest, no mortgage insurance, and lower payments. The cons are tying up capital that may earn higher returns if invested.
Are there any tax breaks for first-time home buyers in Canada?
Yes, the First-Time Home Buyer Incentive and Home Buyer's Tax Credit provide tax relief for qualifying first-time purchasers.
The Bottom Line
Many first-time home buyers find it challenging to raise enough cash to meet Canada’s down payment rules. However, giving yourself plenty of preparation time, following effective savings strategies, and taking advantage of available incentives can help you overcome this common obstacle on the path to homeownership.
Connect with our Best Mortgage Online experts to discuss your financial situation and explore the optimal down payment options tailored to your needs.