Can't put down a 20% downpayment? Here's what happens

Feb 28, 2023

Down Payment

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There are some scenarios where buying with less than 20% down makes sense.

And how you can save.

As a homebuyer, you’ve likely heard this advice: save up at least 20% of your purchase price before you buy. This is so you can avoid paying mortgage default insurance to the Canada Mortgage and Housing Corporation (CHMC), Sagen (formerly known as Genworth Canada), or Canada Guaranty on top of your loan. Mortgage insurance protects your lender in case you default on your loan.

But with Canada’s average home price hovering around $630,000, saving that lump sum could take years. So what happens if you can’t put down a 20% down payment?

First off, what is a down payment?

A mortgage down payment is the chunk of money you pay upfront when you buy a house. It's usually a percentage of the total purchase price, and it shows the lender that you're serious about buying the place.

And if you’re unsure about what you can afford or how much of a down payment you’ll need, you can always calculate ahead of time so you can get a head start on your home buying journey.

How much of a down payment do you need?

While everyone’s financial situation is different, the general rule of them is that In Canada, if your home is valued under $500,000, you must pay at least 5% in cash.

For homes priced between $500,000 and $1 million, you’ll need at least 10% of the part of the price above $500,000 and 5% of the part of the price under $500,000 in cash.

If the home’s purchase price is over $1 million or the home is not your primary residence (including an investment property), you’ll need a full 20% deposit.

If you put down less than 20%, the insurance premium for your mortgage is calculated as a percentage of the home’s purchase price. You can pay the premium out of pocket, but most people choose to add it to their mortgage and pay it off over the life of the loan.

Are there any benefits to putting down less than 20%?

There are some scenarios where buying with less than 20% down makes sense. If you’re looking to jump into the market as soon as possible, before you’re priced out, you might be better off buying with whatever you’ve got. Just ensure you’re ready for the higher cost of living associated with your home purchase over the length of your loan.

Another reason to go in with less than 20% is you could be locking in a low interest rate, which would make your payments very affordable in the foreseeable future. The only downside to this strategy is you should be prepared to fork up to 50% more once your term is done–especially if you’re on a variable rate–in case interest rates sharply rise over the length of your term.

The last scenario is if you’ll receive a better return on investment if you put your money elsewhere instead of just directly into a down payment. An example of this can be investing in yourself by getting a certification or higher education, starting a business, or injecting the money into a retirement fund.

How can I save more money for a down payment?

If you know you’re going to put down less than 20% on a property but still need to save up a bit more, here are some tips to help you:

Create a budget: The first step to saving more money is to understand where your money is currently going. Create a budget to help you track your income and expenses. Look for areas where you can cut back on unnecessary spending and redirect that money towards your down payment savings.
Set a savings goal: It's important to have a clear goal in mind when saving for a down payment. Determine how much you need to save and how long it will take you to reach that goal. Be realistic, but also challenge yourself to save more than you initially think is possible.
Automate your savings: Make it easy to save by automating your savings. Set up a direct deposit from your paycheque into a separate savings account dedicated to your down payment. This way, you won't even have to think about it – the money will be saved automatically.
Look for ways to earn extra money: Consider taking on a side hustle or freelance work to earn extra money that can go towards your down payment savings. You can also sell items you no longer need, such as clothing, furniture, or electronics.
Cut back on housing expenses: If you're currently renting, look for ways to cut back on your housing expenses. Consider downsizing to a smaller apartment or finding a roommate to split costs with. You can also negotiate your rent with your landlord or look for more affordable housing options.
Avoid unnecessary purchases: When saving for a down payment, it's important to prioritize your spending. Avoid making unnecessary purchases, such as expensive dinners out or impulse buys. Stick to your budget and remind yourself of your savings goal.
Consider a co-borrower or guarantor: If, however, you want to get into the market a little sooner, consider going in on a property with a co-borrower or finding a guarantor. This is a huge decision, so be sure you fully trust the person you’re proposing joint ownership to before enjoying the benefits of another investor.
Tap into the bank of mom and dad: If–and this is a big if–there’s an opportunity to get your down payment gifted, you can often look to family to see if this is a possibility for them to help you afford the down payment upfront. However, like a co-borrower, this often requires a big discussion to make sure your gift givers are comfortable with this decision.

The bottom line

Not having 20% down shouldn’t stop you from buying the home you want. Remember, saving for a down payment takes time and effort. But with a clear plan in place and a little bit of discipline, you can reach your goal and make your dream of owning a home in Canada a reality.

If you have more than 5% of the purchase price saved up, apply with Pine today and we’ll connect you with a mortgage agent to discuss your options.

You never know, you might be better off buying now rather than waiting until you have the 20% down payment saved up.

Are there any benefits to putting down less than 20%?

How can I save more money for a down payment?

If you know you’re going to put down less than 20% on a property but still need to save up a bit more, here are some tips to help you:

Create a budget: The first step to saving more money is to understand where your money is currently going. Create a budget to help you track your income and expenses. Look for areas where you can cut back on unnecessary spending and redirect that money towards your down payment savings.
Set a savings goal: It's important to have a clear goal in mind when saving for a down payment. Determine how much you need to save and how long it will take you to reach that goal. Be realistic, but also challenge yourself to save more than you initially think is possible.
Automate your savings: Make it easy to save by automating your savings. Set up a direct deposit from your paycheque into a separate savings account dedicated to your down payment. This way, you won't even have to think about it – the money will be saved automatically.
Look for ways to earn extra money: Consider taking on a side hustle or freelance work to earn extra money that can go towards your down payment savings. You can also sell items you no longer need, such as clothing, furniture, or electronics.
Cut back on housing expenses: If you're currently renting, look for ways to cut back on your housing expenses. Consider downsizing to a smaller apartment or finding a roommate to split costs with. You can also negotiate your rent with your landlord or look for more affordable housing options.
Avoid unnecessary purchases: When saving for a down payment, it's important to prioritize your spending. Avoid making unnecessary purchases, such as expensive dinners out or impulse buys. Stick to your budget and remind yourself of your savings goal.
Consider a co-borrower or guarantor: If, however, you want to get into the market a little sooner, consider going in on a property with a co-borrower or finding a guarantor. This is a huge decision, so be sure you fully trust the person you’re proposing joint ownership to before enjoying the benefits of another investor.
Tap into the bank of mom and dad: If–and this is a big if–there’s an opportunity to get your down payment gifted, you can often look to family to see if this is a possibility for them to help you afford the down payment upfront. However, like a co-borrower, this often requires a big discussion to make sure your gift givers are comfortable with this decision.

The bottom line

If you have more than 5% of the purchase price saved up, apply with Pine today and we’ll connect you with a mortgage agent to discuss your options.

You never know, you might be better off buying now rather than waiting until you have the 20% down payment saved up.

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