Mortgage Down Payment

The down payment is the amount of money that you put forward when you buy a home. This amount is usually a specific percentage of the purchase price, most often 5%, 10% or 20% of the house price. 

Minimum down payment 

In Canada, there are some rules that determine how much home buyers need to pay and it depends on the cost of the property. 

For homes under $500,000 the minimum down payment required is 5%. 

Property worth between $500,000 and $999,999 will require a 5% payment for the first $500,000 and 10% for the amount that is over $500,000. 

If the property price is over $1,000,000 the minimum down payment will be 20% and could be higher 

In addition to putting forward a down payment, mortgages that have down payments under 20% also require mortgage default insurance. This is also called CMHC insurance. It protects the lender in the event that the borrower defaults on the mortgage. In Canada, mortgages that have down payments under 20% are called high-ratio mortgages while ones that have 20% or more for a down payment are referred to as conventional mortgages. 

A recent Home Buyers Report noted that 30% of Canadians looking to buy a home were aiming for a 20% down payment.

Impact of your down payment

The amount of your down payment can have a big impact on your mortgage and housing options in some important ways. Here are three ways that your down payment affects your mortgage:

What kind of home you can afford

Your down payment directly determines your maximum affordability. In Canada, the minimum amount that you are required to put forward as a down payment is 5%. Even without knowing what your debt service ratios are, you can determine how much you can afford to spend on a home by dividing your down payment amount by 0.05. That is the largest amount that you can spend on a home, assuming your income is high enough to qualify.

Your mortgage amount and monthly payment

The more you put down for an initial payment on a home, the smaller the mortgage you will need to take. This means that your down payment can reduce the monthly mortgage payments you make. This also ultimately affects how much you pay in total interest expenses over time.

How much CMHC insurance you need to pay

When you put forward a down payment that is under 20% of the property cost, you will need to pay for default insurance to protect against a possible default of the mortgage. Therefore, the more you put for a down payment, the less insurance premiums you will need to pay. You also pay a lower rate of default insurance if you get to 5.00%, 10.00%, 15.00% or 20.00%.

Down payment example

To help you understand better the impact that your down payment has on the amount you borrow and how much you can afford to pay for a property, here is an example. 

If the home you want to purchase costs $400,000, the mortgage rate is 3% and has a 25-year amortization period, depending on whether you put down $20,000 or $40,000 you may end up paying much more than you expect. 

  1. With a $20,000 down payment and CMHC insurance premiums of $15,200 your total mortgage is $395,200. That means you will have a monthly mortgage payment of $1,870 and will pay a total of $561,080 over 25 years. 
  2. With a $40,000 down payment and CMHC insurance premiums of $11,160 your total mortgage will be $371,160. With $1,756 monthly mortgage payments, you will pay a total of $526,949 over 25 years. 

Where to find more money for down payments

There are a variety of places that you can turn to in order to boost the amount of down payment you have to purchase a home. These include:

  • Paycheque savings
  • Selling stocks, bonds or other property
  • Gifts from immediate family
  • Borrowed money

An additional resource to help you find more for your down payment is the RRSP Home Buyers Plan. With this program, home buyers are able to take out up to $25,000 from their RRSP to buy a home. This is tax-free money for you to use. You could even start investing in an RRSP well before you are ready to buy a home with the intention of using this program to help you when you find your dream home. 

Loan-to-value ratio

When you are thinking about a down payment, you can also consider what the loan-to-value (LTV) ratio will be. This equation compares the mortgage value to the home price. In Canada, the maximum LTV ratio is 95% because the minimum down payment amount is 5%. 

To calculate your LTV ratio you can approach it in two ways:

Take the home value and subtract the down payment amount. This will give you the mortgage value. Next, take the mortgage value and divide by the home price. The sum is the LTV ratio, expressed as a percentage.  For example, if your home value is $300,000 and your down payment is $30,000, the mortgage value will be $270,000. From there, if you divide the mortgage value by the home price, your LTV ratio is 90%. 

$300,000 - $30,000 = $270,000
$270,000 ÷ $300,000 = 0.90 (expressed as 90%)

Alternatively, you can divide your down payment amount by the home price to get the percentage of your down payment. Then, subtract the down payment percent from 100% (which signifies the home price as a percentage). The total will give you the LTV ratio as a percentage. For example, if your home value is $300,000 and your down payment is $60,000, the percentage of down payment is 20%, which means your LTV value is 80%.

$60,000 ÷ $300,000 = 0.20
1.00 - 0.20 = 0.80 (expressed as 80%)

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