Whether it's your first or fifth, purchasing a house is a significant milestone in your life. The decision to become a homeowner comes with several financial choices. Two of the most important decisions are your mortgage and your mortgage down payment.
If you need a refresher on mortgages, let’s quickly review the basics before diving into the main topic.
What Is a Mortgage Down Payment?
A mortgage down payment is the money you pay upfront to secure a home purchase.
Lenders deduct the down payment from the total purchase price of your home, making the loan amount equal to the total price minus the down payment.
In Canada, several factors influence the size of the mortgage down payment. Typically, lenders require a deposit of 20% of the house’s purchase price. Yet, a minimum down payment could be as low as 5%.
It’s to your benefit to save close to or more than 20%. For those who save less, mortgage loan insurance for your financial institution can help you get into a home you can afford because it provides them valuable protection against the potential of default.
How Much Is Needed for a Home Down Payment?
Each country has specific rules defining the minimum down payment required for a residential property. In Canada, the minimum down payment is based on the home’s full purchase price. Generally, the higher the price tag on your potential purchase, the larger the down payment you’ll need.
Canada’s lending rules distinguish three clusters of mortgage down payments:
For homes with a total purchase price under $500,000, the starting point is 5%.
For residential properties ranging from $500,000 to $1,500,000, the minimum is 5% for the first half a million and 10% for the remainder.
While national lending rules are critical for approvals, some lenders require higher down payments to qualify buyers. For example, self-employed individuals or those with poor credit scores are often asked to provide larger initial payments when applying for a mortgage. If you fall into this category, please explore our Fresh Start Mortgage to see if it’s a better option for you.
Types of Mortgage Down Payments
Mortgage down payment options vary based on how much of the property’s price you’re able to pay upfront. A conventional mortgage requires a minimum down payment of 20%. A low down payment insured mortgage requires you to pay for insurance that will protect your financial institution against default. While the insurance adds to your overall costs, it provides you with essential protection and enables access to homeownership with a smaller down payment.
Purchasing a House
Purchasing a residential property or applying for a new build mortgage can feel overwhelming, but understanding the mortgage system can help you make a well-informed financial decision.
A traditional 20% deposit on a house has been an industry standard in Canada. However, the amount you’ll be asked to pay upfront depends on your credit history, current income level, and debt-to-income ratio. Lenders rely on this information, plus your ability to save for a down payment, to prove you are prepared to repay a multi-year loan. So, if your current financial standing is stable, you’re more likely to secure a lower deposit.
Benefits of a Down Payment
The chief benefit of a down payment is simple: it saves you money. Imagine taking a $150,000 loan with a 5% interest rate for 30 years. In the first year alone, you’ll pay $7,500 in interest. A 30-year mortgage for the same amount and rate will cost you over $139,000 in interest over the life of the loan!
If you instead made a down payment of $30,000, your loan amount would now be $120,000. This would cause your first-year interest expense to drop to $6,000 and your total interest expense to drop to $111,000. Your down payment, in this example, would save you nearly $28,000! A down payment also makes monthly mortgage payments more manageable. A $150,000 loan at 5% interest results in monthly charges of $805, while a $120,000 loan with $30,000 paid upfront is $644 per month.
With a larger initial deposit, you may feel there isn’t a need for loan creditor insurance. While life, disability, critical illness, and job loss protection add to the overall cost of the loan, it helps protect you against the unexpected. It can also earn you a lower mortgage rate, which may offset the additional cost.
Why Should You Make a Down Payment?
An initial deposit proves your financial preparedness to buy a residential property. Your savings behavior reassures the lender you’re committed to responsible money management. In many cases, your mortgage payments and property taxes will be higher than your current rent. Showing your ability to save and budget indicates you’re prepared to handle the increase.
Another reason for making a down payment is to protect yourself if you need to relocate during a housing market fall. If you bought your house without an initial deposit at a market peak, you may owe more than your home is worth, making it tricky to sell your property. In this situation, options are limited: you might face a significant financial loss, damage to your credit score, or both. Many individuals in such a predicament hold onto their houses, hoping things will get better.
While a down payment won’t entirely shield you from a downturn, it will provide a solid buffer. As long as your home's value doesn’t drop by over 20%, you'll be in a significantly stronger position.
What Should the Size of Your Mortgage Down Payment Be?
Although a 20% down payment is the industry norm in Canada, it is not mandatory. The minimum initial deposit may be as low as 5%, depending on the house’s full purchase price and the terms provided by the lender.
In Canada, the absolute value of a mortgage down payment is determined by the cost of housing in the region where you want to buy your home. If you decide on a less costly region, the amount of the initial installment will be significantly smaller.
If you don’t have the funds available, you may apply for a down payment as low as 5% of the purchase price. However, if you provide less than 20% of the total purchase price, the lender will require you to mortgage loan insurance through one of the Canadian Mortgage Insurers.
What is Mortgage Loan Insurance?
Mortgage loan insurance gives your financial institution the peace of mind when offering you a mortgage with less than 20% down payment that they will be protected in the case of default on your mortgage. Typically, loan insurance costs range between 0.6% and 4.5% of the mortgage balance. A breakdown of the insurance prices in Canada is illustrated in the following table:
Mortgage Amount | Mortgage Default Insurance Cost |
Up to 80% | 0.00% of the mortgage amount |
Up to 85% | 2.80% of the mortgage amount |
Up to 90% | 3.10% of the mortgage amount |
Up to 95% | 4.00% of the mortgage amount |
In Canada, mortgage insurance is usually offered by one of the following Institutions:
The Canada Mortgage and Housing Corporation (CMHC) - Canada Mortgage and Housing Corporation | CMHC
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