A down payment is a lump sum payment made when you purchase a home. The difference between the purchase price of the home and your down payment will become the amount of your mortgage. The minimum down payment required depends on your home's purchase price.
Note: In Ontario, the CMHC premium is subject to an additional 8% HST.
Your minimum down payment depends on the purchase price of your property.
|Purchase Price||Minimum Down Payment (% of Purchase Price)|
|$500,000 to $999,999||5% of the first $500,000, then 10% of remainder|
|$1 million and up||20%|
The amount of your down payment affects what opportunities you’ll have for your mortgage. With the minimum down payment of 5% for properties under $500,000, you will have a larger mortgage and have to pay a CMHC insurance premium of up to 4%. While you will have to pay less upfront today, you will have to pay more in interest over the long run compared with making a higher down payment at the same interest rate.
Another disadvantage shows up in the mortgage stress test where you must show that you can still afford mortgage payments even if the interest rate rises. If you have a larger outstanding mortgage owing, your monthly mortgage payments could be significantly higher. Having less equity in your home also means that it will be more difficult to qualify for a mortgage refinance or products such as a home equity line of credit (HELOC), which can have loan-to-value requirements.
On the other hand, a down payment of 20% or greater gives mortgage lenders more flexibility in case you default on your mortgage or property prices go down. As a result, you can avoid paying for mortgage insurance.
Your mortgage lender may require you to make a higher down payment in order to qualify for a mortgage from them. This can be due to a variety of reasons, such as if you are self-employed or if you have a poor credit history. Newcomers to Canada, such as recent immigrants, may qualify for a mortgage even without a Canadian credit history. Special programs for newcomers may require a higher down payment, however.
Mortgages with a down payment of less than 20%, or high-ratio mortgages, usually have lower mortgage rates than low-ratio mortgages with a down payment of 20% or higher. This is because borrowers will pay for mortgage insurance (e.g. CMHC mortgage insurance), which offsets most of the risk to the lender. As a result, lenders often offer the lowest mortgage rates for low or minimum down payment mortgages.
If you can afford it, making a down payment of 20% or more will allow you to avoid having to pay for mortgage default insurance, and it can give you more flexibility in your financing options.
Making a down payment of less than 20% will limit your housing options in certain cities, such as Vancouver’s housing market and Toronto where the average price of a home is approaching $1 million. If you require a longer amortization period, you will also need a down payment of 20% or greater.
In addition to a down payment, there are also closing costs that you will need to pay upfront. These costs, such as land transfer tax, legal fees, and moving expenses, can add up to thousands of dollars.
If you are a professional real estate investor, however, you may want to minimize your down payment in order to maximize your return. You can find the potential return of your real-estate investment using our cap rate calculator.
The general rule of thumb for mortgage eligibility is that you can borrow around four times your annual household gross income, and no more than 32% of your gross income should go for housing and mortgage expenses. However, there are more factors involved in calculating your mortgage affordability amount and consequently, the real calculation is more complicated. Your monthly non-housing expenses, such as food and utilities, and also your monthly debt payments are involved as they reduce the amount of income you have for your mortgage payments. A quick way to check is to use a mortgage payment calculator to see how much payments are required every month.
For example, say you have an annual household income of $140,000 and have saved $70,000 for a down payment. Your monthly non-housing expenses are $2,000, you’re paying off your student debt at around $300 monthly and your car loan costs you $400 per month. That’s $2,700 from your monthly income to start with. Your mortgage affordability, the amount you can afford to spend on a home, works out at $658,000.
You can find out how much you can afford by using our mortgage affordability calculator.
After the mortgage stress test was introduced in October 2016, and later revised and expanded in January 2018, buyers’ affordability decreased significantly. The aim of the mortgage stress test is to ensure that homeowners in Canada can still meet their mortgage payments if the interest rate rises. This is especially important while our interest rates are at historical lows. This helps to protect the Canadian economy, specifically the real estate sector, against any future financial stress. You need to show that the monthly mortgage payments still fit into your monthly income by using the greater interest rate of your mortgage rate plus 2% or the stress test qualifying rate of 5.25%, as of June 1st, 2021. To use your current annual income as the base, you must have passed the probation period which means you have been in the job for at least three or six months.
Try out the mortgage stress test using our stress-test calculator.
Some provincial and municipal governments offer financial assistance to first-time home buyers. This can be in the form of transfer tax rebates, income tax credits, or direct cash payments. Some programs include down payment assistance, which may be in the form of an interest-free loan that will cover the down payment for a new home purchase.
For example, New Brunswick’s Home Ownership Program provides an interest-free loan of up to $75,000 for first-time homebuyers with an income under $30,000. Manitoba’s Rural Homeownership Program provides a forgivable loan of up to 25% of the purchase price of select rural properties. Nova Scotia’s Down Payment Assistance Program provides an interest-free loan of up to 5% of the purchase price of a home to cover the minimum down payment.
Federally, the First-Time Home Buyer Incentive helps provide interest-free financing through a shared equity mortgage, of up to 10% the purchase price of a newly constructed home, or 5% for existing homes. Otherwise, some homeowners finance their down payment by contributing to their TFSA.
Mortgage default insurance, also known as Canada Mortgage and Housing Corporation (CMHC) insurance, protects your mortgage lender in the event that you default on your mortgage. Under the Office of the Superintendent of Financial Institutions (OSFI) regulations, you are required to purchase CMHC insurance or private mortgage insurance if your down payment is below 20%. Alternative mortgage default insurance providers include Canada Guaranty and Genworth/Sagen.
Only properties with a purchase price below $1 million are eligible for CMHC insurance. This means that you can make a down payment as low as 5% for properties less than $500,000. If your home’s purchase price is greater than $1 million, you must make a down payment that is 20% or greater.
With CMHC insurance, your mortgage’s amortization period can also not be longer than 25 years. If you wish to have a longer amortization period, your down payment must be 20% or more.
Your CMHC insurance cost is calculated as a percentage of your purchase price. The exact percentage depends on your down payment amount and decreases for larger down payments. Insurance premiums range from as low as 0.6% of the total mortgage for down payments of 35% or more, to as high as 4.00% of the total mortgage for down payments of 5%.
Using a CMHC insurance calculator can help you determine the cost of CMHC insurance premiums that will apply to you, along with applicable sales tax. Provincial sales tax is added to insurance premiums in Ontario, Quebec, Manitoba, and Saskatchewan.
Your lender is the party responsible for paying CMHC insurance costs, but in the majority of cases, your lender will pass these costs down to you by adding the CMHC insurance premium to your mortgage loan. This will slightly increase your monthly or bi-weekly payments. In some cases, your lender may allow you to pay CMHC insurance costs as a lump-sum. Only in a few exceptional cases will the lender pay for your mortgage insurance.
By putting a minimum down payment of 20% you can avoid paying CMHC insurance. If you put a down payment of less than 20% on your new home, your mortgage is considered a high ratio loan (ratio of loan to home value) and consequently you must take out CMHC insurance to cover the lender if you default on the mortgage. CMHC insurance premiums can run into the thousands of dollars.
For example, on a $500,000 home, here are the insurance premiums for various down payment percentages.
|Down Payment||CMHC Insurance Premium|
Using a down payment of 20% or more exempts you from paying CMHC insurance. However, mortgage lenders may require you to get CMHC insurance even if you make a down payment greater than 20%, depending on your financial situation. Lenders can still be responsible for CMHC insurance premiums, but they generally pass it on to you by putting it on the mortgage, and that can increase your monthly payment slightly. That is a reason why the mortgage rate that you can get for a 35% down payment is lower than for a 20% down payment, since lenders need to pay less CMHC mortgage default insurance.