Down Payment Guide: What You Need to Know When Saving for a Home

There are many expenses to consider when buying a home, but possibly the most significant one is the down payment - which can range from 5% to 20% of the home’s purchase price.  While your lender will take care of providing the mortgage money to your real estate lawyer, the down payment is up to you to pay in full on closing day. Knowing how much you’ll be required to pay can better help you find a home within your budget.

To ensure your home buying process goes smoothly, and more importantly to keep your expenses in check, let’s take a deeper look at down payment requirements, how to save for one, and the pros and cons of a 5% down payment vs. a 20% down payment.

Minimum Down Payment Requirements

The exact amount you will pay for a down payment depends on the purchase price of your home, however, keep in mind that if you have the means to, you can put down more than the minimum.

According to the government of Canada, when the purchase price of a home is $500,000 or below, the minimum down payment required is 5% of the purchase price. This means if you bought a home for $450,000, you would be required to pay $22,500 for the minimum down payment.

If the purchase price of your home is between $500,000 and $999,999, then you’d be required to pay 5% of the first $500,000, and 10% for the portion above $500,000. Simply put, this means if you bought a home for $700,000, you’d pay $45,000 for the minimum down payment (5% of the first $500,000 equals $25,000 and 10% of the remaining $200,000 equals $20,000).

For homes that cost $1 million or more, you’d be required to pay 20% of the purchase price. Let’s say you bought a home at the August 2023 Greater Toronto Area average price of $1,082,496 - you’d be required to pay $216,499 for the minimum down payment.

Another fee to consider is mortgage default insurance, which is required for down payments less than 20% of the home’s purchase price. This can cost anywhere from 0.6% to 4.5% of the total amount borrowed from the lender.

Smaller vs. Larger Down Payment: What Should You Choose?

You might be thinking, “why would I choose to pay more money than I’m required to for a down payment?” Well, that’s because putting down the full 20% down payment removes the need for mortgage default insurance and usually means a lower interest rate on your mortgage. Generally, the lender will consider you lower risk with a larger down payment, leading to a lower interest rate. This means you could potentially save money over time and your total cost to borrow would be less.

For example, if you bought an $850,000 home and put down the required minimum of $60,350, then your monthly mortgage payment would be $4,889 for a 5-year fixed rate of 5.24% amortized over 25 years. Alternatively, if you put down a 20% down payment of $170,000 on the same home, then your monthly mortgage payment would decrease to just $4,147 for a 5-year fixed rate of 5.24% amortized over 25 years. This amounts to hundreds of dollars in savings per year.

Another reason you might be interested in putting down a larger down payment is to make your offer on a home more attractive to the seller. If you end up in a bidding war over your dream property, then offering to pay a larger down payment proves you’re financially secure and can give you a competitive edge.

However, it's not always feasible to put down a larger down payment and in that case it's better to just put down the minimum. For many first-time home buyers, getting into the real estate market sooner, rather than later, is more important and it's also a chance to start building equity in your home.

New homeowners may also want to keep money aside for renovations, decorations or even practical expenses such as property taxes, land transfer tax, and lawyer fees. If putting down a larger down payment will use up all of your savings, then it's financially smarter to put down a smaller down payment in order to have leftover money for other household needs and emergencies.

Budgeting for a Down Payment

Saving up thousands of dollars for a down payment might sound daunting, but it is possible and there are some tools to help you. Investing your money in a high-interest savings account is one option for building up your savings. High-interest savings accounts earn more interest than regular savings accounts and have very little risk compared with other investments such as the stock market. To keep yourself committed to your savings goal, consider setting up automatic savings so that a percentage of your salary gets automatically deposited into your savings account.

Another useful resource for helping pay for your down payment is the Home Buyers’ Plan (HBP) and the First-Time Home Buyer Incentive. The HBP allows you to withdraw $35,000 tax-free from your RRSP as long as you use this money to buy or build a qualifying home. For the First-Time Home Buyer Incentive, the government of Canada will offer you a shared equity mortgage to reduce your monthly mortgage payment. It's important to see if your city or local government offers any other type of home assistance programs.

 For more information on current down payment minimums, read Zoocasa’s full report on the estimated detached home and apartment down payments here.