If you're wondering how much a down payment on a house should be, you're not alone. Most people think that a 20% down payment is the absolute minimum, but sometimes 5% is the best you can do and that's okay.
A 5% down payment may be all you've had time to save, or maybe you're interested in the lower mortgage rates that come with having mortgage insurance. But some buyers prefer and are able to make a 20% down payment, which lowers the total amount you'll have to borrow for the mortgage.
There's no easy answer to help you decide what kind of down payment to make, but there are definitely factors to consider before making a decision. There are also a few rules in Canada about when you can make smaller or larger down payments and the possible strings attached.
Here's our guide to what you should think about and how to know the right amount for your situation.
Key Takeaways
- Canadians are required to pay either a minimum 5%, 10%, or 20% down payment when purchasing a new home.
- The minimum amount required depends on the price and type of property you're buying.
- A down payment of less than 20% means the buyer is required to have mortgage insurance, which protects the lender in case you default on the loan.
- If you're purchasing an investment property and aren't planning to live in it, the minimum down payment is 20%.
- Investing with an FHSA and taking advantage of the Home Buyers Plan and/or the First-Time Home Buyer Incentive can help you save and pay for your new property.
Minimum down payment amounts
Canada has a few rules regarding down payments and the purchase price of the home:
| Property price | Minimum down payment | Example |
|---|---|---|
| Less than $500,000 | 5% | A $345,000 property requires a $17,250 down payment |
| Between $500,000 and $999,999 | 5% for the $500,000 ($25,000) plus 10% of the remaining amount | A $869,000 property requires a $61,900 down payment |
| More than $1 million | 20% | A $1,250,000 property requires a $250,000 down payment |
There are also guidelines for purchasing investment properties. If you don't plan to live at the property, your minimum down payment must be 20%. Otherwise, the minimum down payment depends on the number of units the property has.
- If the property has 2 units and you plan to live in one of them, your down payment must be at least 5%.
- If the property has 3 - 4 units and you plan to live in one of them, your down payment must be at least 10%.
Remember, these are only the minimum requirements. If you're able to pay more than these percentage amounts, you should consider doing so since it will lower the amount you'll have to borrow for your mortgage.
What happens if I only provide a 5% down payment?
All down payments that are less than 20% of the purchase price are considered "high ratio" and therefore require mortgage insurance (also referred to as mortgage default insurance). This means that the lender is protected in the event that you default on your payments.
Mortgage insurance premiums depend on the size of your mortgage but typically range from 0.6% to 4.5% of the home's purchase price, minus your down payment.
Sometimes the lender may insist that you get mortgage insurance even if you do provide a 20% down payment. Being self-employed or having a poor credit history can sometimes cause a mortgage lender to require that you do this so that they are better protected.
However, since the lender experiences less risk by issuing a high ratio mortgage, they can often provide you with better rates.
The pros and cons of 20% vs. 5% down payments
While providing a 20% down payment will mean you pay less in interest overall, only being able to provide a 5% down payment isn't the end of the world and can actually grab you lower mortgage rates.
| Down payment amount | 5% | 20% |
|---|---|---|
| Pros | * Easier to save this amount * Allows you to buy sooner * Securing mortgage insurance can mean access to lower mortgage rates * Frees up more money to put towards closing fees, inspections, mortgage payments, etc. |
* Saves you from getting mortgage insurance * 30-year amortization is possible * Overall cost of borrowing is lower (without mortgage insurance) * Reduces the amount of interest you'll pay overall * Lower monthly payments |
| Cons | * Requires that you borrow more for the mortgage * 30-year amortization isn't available * Results in higher monthly payments |
* Can be difficult to save this amount * Not as beneficial if rates are low * Could leave you without any emergency savings |
But how much of a down payment is right for you?
As you have probably gathered, there are many factors to consider when deciding on a down payment. Here are a few of the main points to keep in mind:
- Your personal finances: Consider your short and long-term plans. Will making a larger down payment prevent you from reaching any other financial goals?
- Your mortgage options: Based on the size of your down payment, do your options change? Are the rates better with a lower down payment?
- Current interest rates: Are the current rates favourable? Have there been any recent fluctuations? What are the future predictions?
- State of the housing market: What are the home prices in your desired area? Have they been rising or falling? Are they predicted to rise/fall even more?
It may be a good idea to sit down with your mortgage broker, financial advisor, or other financial professional to discuss these topics and questions with them.
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$250 GeniusCash + Get the best mortgage rate with your personal advisor + Easily close online.How the down payment affects the total cost
The purpose of a down payment is to assure the lender of your commitment to the purchase, and to secure a bit of equity in the property. The amount that you pay goes towards the total cost of the property – this is true of all down payments, whether you want to buy a car, a boat, a vacation property, a new house, or some other large purchase.
Some buyers confuse the down payment with the deposit, but these are 2 different things. A deposit is a payment made to show your commitment to the purchase and is held by a third party until the sale has closed. Buyers typically pay about 5% of the purchase price as their deposit, and this goes towards their down payment amount later.
The process looks like this:
Deposit (due within 24 hours of conditions being met) + Remaining Down Payment (due at completion) + Mortgage (done at completion) = Purchase Price
Example down payment scenario
Let's take a look at an example scenario. Josephine is purchasing a home for $325,000 and is able to make a down payment of 20% and a deposit of 5%. On August 10, she decides to make an offer on the property, draws up the offer with her agent, waits for the offer to be accepted, and then pays the $16,250 deposit to the real estate brokerage that the seller's agent is affiliated with.
The agreed-upon closing date is September 30, which is when Josephine's down payment of $65,000 is due. Since her deposit has covered $16,250 of this amount, she now only has to pay $48,750.
The remaining mortgage she's required to pay off is now $260,000.
Government programs and financial tools to help you save
No matter the amount you end up paying for a down payment, it will take you quite a while to save the proper amount. Luckily, there are government incentive programs and financial products that can help make this a bit easier, including the Home Buyers' Plan, the First Time Home Buyer Incentive, and an FHSA account.
- The Home Buyers' Plan lets you withdraw money from your RRSP to buy or build your first home. You can take up to $35,000, tax-free, and you'll have up to 15 years to pay it back.
- The First-Time Home Buyer Incentive can provide a buyer with a shared equity mortgage in partnership with the Government of Canada. You could receive an additional 5% or 10% to add to the amount they're using as a down payment on their first home. Repayment is required after 25 years or when you sell the property, but you can choose to repay at any time.
- A First Home Buyers Account, or FHSA, is a registered savings plan that allows you to contribute up to $40,000 to be used when you're ready to buy your first home. Contributions are tax-deductible and qualifying withdrawals are non-taxable.
For more information on these and other home buying programs, plans, and incentives, consult this federal resource: How much you need for a down payment.
What size down payment will you make?
Buying a home is likely the largest, most expensive purchase you'll make during your lifetime and it requires a lot of saving and a lot of consideration – including how much of a down payment you can make.
Now that you know what the minimums are and the pros and cons of small vs. larger down payments, what amount do you think is appropriate for your own circumstances? Have you gone through his process already and have tips for others?
Please share your thoughts in the comments section below.
FAQ
How much do I need for a down payment on a house?
In Canada, buyers need to provide a down payment of at least 5% when purchasing a new home. Depending on the cost of the home, you may be required to pay more than this (up to 20%).
How much is a down payment on a house in Ontario?
The rules and regulations about down payments are the same in Ontario as in all other Canadian provinces and territories. This means you're required to pay a minimum down payment between 5% and 20%, depending on the price of the property and if you'll live in it.
Why do I need to make a down payment?
A down payment is required to reassure the mortgage lender that you won't default on the loan. It also helps lower the total amount of mortgage you need to borrow, which results in lower monthly payments.
Down payment vs. deposit – what's the difference?
A deposit is made once all conditions are met to show your intent to purchase and is held by a third party until the sale closes. A down payment goes directly toward the purchase price and is paid at closing.
What's the average down payment made on a house in Canada?
The average down payment in Canada varies by province and territory. Recent numbers show that the average down payment is around 22.5% in B.C., 20% in Ontario, 15% in Quebec, and 15.15% in Alberta.
Is there a minimum amount required for a down payment on a house?
Yes, there are minimum amounts required for down payments, and it depends on the price and type of property. Depending on these factors, you may be required to pay either 5%, 10%, or 20% of the purchase price.
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