How much do you need for a Down Payment?

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 and purchase a property.

But what exactly is a down payment, how much do you need to buy a house in Canada, and what strategies to pay off your mortgage faster?

Whether you’re just starting to save or ready to buy soon, this detailed overview tackles all the key questions surrounding down payments for home purchases in Canada. Being well-informed and setting a solid savings plan will put you in a strong position to achieve your real estate dreams.

What is a Down Payment?

A down payment (DP) 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.

It’s important to note the difference between a down payment and a deposit. The deposit, also called an earnest money deposit, is a smaller upfront amount the buyer pays upon offer acceptance to demonstrate serious intent to purchase. This deposit is later credited towards the total DP due at closing.

Why is a Down Payment Required?

A down payment demonstrates to the lender that the borrower is financially committed to the home purchase. A larger DP signals lower risk for the lender, which can lead to more favourable mortgage rates and terms. In situations where borrowers put little money down on a large purchase, payment issues increase.

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.

Minimum Down Payment in Canada

The minimum DP needed to buy a home in Canada depends primarily on the purchase price. It varies on a scale, with the percentage increasing with higher-priced properties.

Home Price	Minimum Down Payment
Under $500,000	5% of purchase price
$500,000 – $999,999	5% on the first $500,000, 10% on the remainder
Over $1 million	20% of purchase price

While meeting the minimum legal requirements helps improve affordability, buyers who put down less than 20% may miss the advantages of a lower LTV ratio.

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 the first quarter of 2024 was 13.6%, with a median of $26,000. [Source]

While having a DP above 20% provides many benefits, there are some 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% 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.

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 – Also called CMHC insurance, this high-ratio insurance is required by law for DP under 20%. Avoiding it saves 2.4% to 4% of the mortgage in premiums. [Source]

Lower interest costs – The larger your DP, the smaller your required mortgage amount will be. This results in paying less total interest over the amortization period.

Lower monthly payments – A bigger DP 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 DPs as less risky, so may offer better interest rates and mortgage terms.

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	Mortgage Amount	Monthly Payment	Interest Paid
5% ($25,000)	$475,000	$2,528	$443,000
10% ($50,000)	$450,000	$2,390	$417,000
20% ($100,000)	$400,000	$2,128	$366,000

As shown, the higher DP results in substantial interest savings over the life of the mortgage and a lower LTV ratio. The buyer with 20% down pays $77,000 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 you could potentially invest elsewhere.

Mortgage default insurance is required by law for down payments of less than 20% of the purchase price. This insurance protects the lender against default risk by covering their losses if the homeowner can’t pay.

Premiums for this insurance vary from 2.4% to 4% of the mortgage amount, depending on the loan-to-value ratio. It can either be paid as a single lump sum upfront or added to the mortgage principal and paid off over time.

Mortgage loan insurance is not required in Canada for those with a DP of 20% or more. The exception is for borrowers deemed at higher risk, in which case some lenders may still require it.

Sources for Down Payment Funds

When it comes to putting together a down payment, buyers have several 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 DP 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 DP 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

The 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. [Source]

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. In 2024, the maximum federal rebate is $7,500, with further rebates available in some provinces. [Source]

First Home Savings Account

FHSAs allow tax-deductible savings of up to $8,000 annually, to a lifetime maximum of $40,000, for first-time buyers.

How to Save for a Down Payment?

Here are some 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 DP fund.

Pay down debts – Eliminating credit cards, loans, and other debts frees up extra cash flow that can be put toward the monthly DP. This can also help lower your LTV ratio.

Set up automatic transfers – Arrange for a percentage of each pay cheque to be auto-transferred into a dedicated DP savings account.

Contribute lump sums – Put any windfalls like tax refunds, bonuses or monetary gifts directly into your DP 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 DP capital.

Give yourself time – Start saving immediately and give yourself several years to accumulate funds. Avoid raiding retirement savings if possible.

Key Takeaways on Mortgage Down Payment in Canada

Here are some key takeaways about mortgage down payment in Canada:

• The minimum DP is 5% for homes under $500K, 5% on the first $500K, plus 10% on the remainder for homes up to $999,999, and 20% on homes over $1 million.
• Aim for 20% down to get the lowest LTV and avoid mortgage insurance premiums.
• However, down payments above 20% have tradeoffs like tying up capital and potential missed price gains.
• Mortgage loan insurance is required by law for down payments of less than 20% of the purchase price.
• Savvy budgeting, debt reduction and contributing lump sums can help buyers reach their down payment goal faster.
• Government programs like the Home Buyer’s Plan allow first-time buyers to borrow from RRSPs for a down payment.
• Higher down payments substantially reduce overall interest costs and monthly mortgage payments.

Many first-time home buyers find it challenging to come up with 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.

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Article Sources

1. How Much Downpayment Do You Need to Purchase a Home?
2. How much you need for a down payment
3. Guide to down payments