Not to be confused with your deposit, your down payment plays a crucial role in your journey towards home ownership.

Your down payment is the amount of savings you’ve set aside to pay directly towards the purchase price of your house.

It directly influences how much home you can afford – the larger down payment you have, the higher purchase price you can afford.

Understanding a Down Payment

The minimum down payment in Canada varies, impacting your home purchase. Different types of minimum down payments have different effects on your mortgage.

Minimum down payment in Canada

Have you ever wondered why some families rent a home or apartment when they could purchase? That’s because there’s a minimum down payment you must come up with.

In Canada, buying a home starts with a minimum down payment of 5% on the first $500,000 of the purchase price. For any amount over $500,000, you need to pay 10%. This rule helps Canadians enter the housing market.

To avoid additional costs like the CMHC premium, which can reach up to 4%, making a 20% down payment is wise. Real estate professionals and financial advisors suggest this larger down payment to lower your monthly payments and save money on interest over time.

Understanding different types of minimum down payments can significantly impact your home purchase experience.

Here are the different types of minimum down payments in Canada:

• For homes under $500,000, buyers need to put down at least 5%. This makes it easier for first – time buyers to enter the housing market.
• Homes priced between $500,000 and $999,999 require a 5% down payment for the first $500,000. Any amount over that requires an additional 10%. This method helps manage the loan amount as property values increase.
• Properties costing $1 million or more demand a 20% down payment. High – value real estate markets often mean larger loans, so a bigger down payment helps reduce financial risk.

Conventional vs. High Ratio Mortgage

There are two important down payment thresholds to be aware of: minimum down payment and high ratio mortgage. If you have a down payment between 5% and 19.99% your mortgage is considered high ratio and you’ll need to purchase mortgage insurance.

You’re considered a higher risk, so mortgage insurance protects your lender if you default. CMHC insures the lion’s share of mortgage, while private insurers like Genworth insure the remainder.

Although you’ll have to pay insurance premiums along with your regular mortgage payments, it’s not necessarily a bad thing – you’ll qualify for the same mortgage rate as someone with a conventional mortgage (a down payment of 20% or more).

Impact on home purchase

A larger down payment affects your home purchase in many ways. It lowers your mortgage amount, which means you will pay less interest over time. This makes your monthly payments more affordable and saves you money in the long run.

Also, if you put down 20% or more, you avoid paying CMHC insurance premiums. These premiums can add up to a significant cost on top of your loan.

Choosing less than a 20% down payment requires mortgage default insurance. This is an extra fee that protects the lender if you can’t pay back the loan. While it allows buyers to enter the real estate market sooner, it also increases the overall cost of buying a property.

The size of your down payment directly impacts financial planning for homeownership, influencing both short-term affordability and long-term expenses.

How much should I put as a down payment?

Typically, it’s a good idea to put down as much as possible (just don’t forget to also budget an additional 1.5% to 4% for closing costs).

A larger down payment will mean a lower mortgage payment and less interest over the life of your mortgage. If you have a high-ratio mortgage a larger down payment also means lower mortgage insurance premiums.

Where Can Your Down Payment Come From?

Your down payment can come from personal savings, gifts from family, or government programs. With home price skyrocketing, it’s harder than ever to scrap together enough funds to meet the minimum 5% down payment in expensive markets like Toronto and Vancouver.

Personal savings is usually the first source for homebuyers. A high interest savings account or TFSA (tax-free savings account) are great places to sock away your hard-earned money to reach your goal of homeownership. You can also cash in your mutual funds, stocks and bond, although those aren’t the safest place to store your money since they can be volatile.

A lot of boomer parents of gifting their children a portion of their down payment to meet the 20% threshold and avoid mortgage insurance.

If you have an RRSP, you can borrow up to $35,000 towards your down payment under the Home Buyers Plan (HBP), although you’ll need to start paying it back in year two or it will be added to your income and taxed at your marginal tax rate.

Personal savings

Saving for a down payment is crucial in homeownership. Personal savings play a significant role in this process, allowing individuals to contribute financially and take ownership of their home purchase.

By prioritizing budgeting and reducing debt, individuals can steadily build up their personal savings to meet the minimum 5% requirement for a down payment.

Additionally, starting a designated down payment savings account can help separate these funds from everyday expenses and track progress toward the goal of homeownership.

Gifts from family

When it comes to the down payment for a house, family members can help by gifting funds. However, these gifted funds must be proven as a genuine gift and not a loan.

It’s important to note that a gifted down payment cannot negatively impact the borrower’s debt-to-income ratio, ensuring that the financial support from family members is acceptable as a source for the home purchase.

Such financial support from family members can be crucial for first-time homebuyers looking to make a significant investment in their future.

Government programs

Government programs can provide assistance with your down payment. For instance, the Home Buyers Plan allows first-time homebuyers to withdraw up to $35,000 from their RRSP for a down payment.

Your Tax-Free Savings Account (TFSA) is also a great way to save towards your down payment. By investing after-tax dollars, the funds will grow tax-free inside until you’re ready to withdraw them and use them towards the down payment of your home.

These government initiatives are designed to support potential homeowners by easing their financial burden when purchasing a property. By taking advantage of these programs, individuals can receive crucial financial support and make owning a home more accessible.

How Does an ‘Insured’ Mortgage Impact Your Rate?

An ‘insured’ mortgage, often necessary for down payments less than 20%, results in a higher CMHC premium. This additional cost, up to 4% of the mortgage amount can significantly increase your borrowing expenses.

With such mortgages, lenders face lower risk due to default insurance provided by CMHC. However, this reduced risk does not translate into lower rates – rather, it may result in higher interest rates because of the added default insurance costs passed onto borrowers.

Such ‘high ratio’ insured mortgages can lead to an increased total expense over time due to a higher amortization period and continued payment of insurance premiums. On other hand with a conventional mortgage or larger initial down payment, you are likely to secure more favorable terms with potentially lower interest rates and overall savings on loan repayments.

Can a Conventional Mortgage Save You More?

After understanding how an ‘insured’ mortgage impacts your rate, it’s essential to consider whether a conventional mortgage can save you more. Opting for a conventional mortgage with a 20% down payment can lead to significant savings.

With this type of mortgage, there is no need for the additional cost of mortgage loan insurance, which could be as high as 4% of the loan amount. This means that by choosing a conventional mortgage and making a larger down payment, you could potentially save thousands of dollars in the long run.

The Benefits of a 20% Down Payment

A 20% down payment can improve your credit situation and reduce the need for mortgage insurance. It allows for greater control over your home financing and can lead to long-term savings.

Improved credit situation

A 20% down payment can lead to an improved credit situation by reducing the loan amount and lowering interest payments. With a larger down payment, borrowers are seen as less risky to lenders, which can enhance their credit standing.

This can result in significant financial perks through minimized extra costs and benefits of a larger down payment.

Making a 20% down payment aids in avoiding mortgage insurance fees, leading to an improved financial situation while minimizing extra costs over time. Additionally, it allows for reduced loan amounts and lower interest payments throughout the life of the mortgage.

Avoiding mortgage insurance

Not only does the size of your down payment affect your housing budget, it also determines if you have to pay mortgage insurance. If you have a down payment of 5 to 20 per cent, your mortgage is considered high ratio and you’ll need to purchase mortgage insurance.

Since you’re putting down less money, you’re considered a higher risk of default; mortgage insurance is meant to protect lenders if you aren’t able to pay back your mortgage in full.

Mortgage insurance is provided by CMHC and private mortgage insurers such as Genworth. The amount of mortgage insurance required is based on the size of your down payment. Mortgage insurance is added as a lump sum to your total mortgage amount and the premiums are paid over the life of your mortgage with your regular mortgage payments.

If you’re fortunate enough to have a down payment greater than 20 per cent, your mortgage is considered conventional and you’ll avoid purchasing mortgage insurance.

This considerable savings can amount to thousands of dollars compared to a lower down payment with CMHC insurance.

Conclusion

To sum up, understanding the minimum down payment in Canada is crucial when considering a home purchase. Saving for a 20% down payment not only avoids mortgage insurance but also improves your credit situation and lowers monthly payments.

With careful planning and financial discipline, you can make your dream of owning a home a reality.