How much you'll need for a down payment in Canada

Ready to purchase your dream home? You’ll be pleasantly surprised to know that you won’t need to offer the entire cost up-front. 

Instead, thanks to the option of mortgage financing, you can offer up a down payment and get started on building your equity. But, how much down payment will you need? And how will the amount affect your mortgage rates? 

What is a down payment?

For most Canadians, in order to secure a mortgage loan, most financial providers–whether a bank or private lender–will need to confirm that you have a down payment. Defined as a lump-sum of money paid up-front, the down payment is a percentage of the overall price of the home, with the rest of the cost being covered by a mortgage. It's a portion of the total purchase price that you pay from your own funds, as opposed to borrowing the amount.

The purpose of the down payment is to decrease the risk for the lender or seller. It shows the lender that you're financially committed to the purchase and can reduce the amount you need to borrow, thereby lowering the lender's risk.

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Is your down payment the same thing as your deposit? 

When your offer to purchase a home is accepted by the sellers, you’ll need to put down a deposit to indicate that you are serious about following through.

Generally, this deposit is a sum of money that is paid upfront and on average is about 5% of the offer price, in the form of a certified cheque or bank draft. 

Consider the deposit a down payment on the down payment. Once the sale officially goes through, the amount of your deposit is deducted from the down payment.

Calculating the minimum down payment you’ll need

Given that a down payment is calculated as a percentage of the total costs of the home, the rule of thumb is: 

• If the home costs $500,000 or less, you’ll need a minimum of 5% of the purchase amount as a down payment
• If the home costs more than $500,000 up to $999,999, your down payment will be 5% on the first $500,000 and then 10% of the remainder above $500,000
• If the home costs $1 million or over, you’ll need a minimum 20% down payment

What sources can your down payment come from?

The sources of a down payment on a home can come from several places. This is subject to rules by individual lenders.

1. Savings or Investments: This is the most traditional source of a down payment. You save money over time in a savings account or investment portfolio and use that money for the down payment. To verify this downpayment source, lenders will require bank statements for the past 3 months.
2. Gift from a Relative: Many people receive gifts from their family to help with the down payment. It's essential to have a gift letter from your relatives stating that the money is a gift and not a loan. To verify this downpayment source, lenders will require a signed gift letter from the giftor.
3. Registered Retirement Savings Plan (RRSP): The Home Buyers' Plan (HBP) allows first-time homebuyers to withdraw up to $35,000 from their RRSP for a down payment, tax-free. If buying with a partner, each can withdraw up to $35,000 for a total of $70,000. However, these funds must be repaid to the RRSP over 15 years. This offers a method where tax can be deferred.
4. Sale of Existing Property: If you're selling a property and moving to a new one, the proceeds from the sale can be used as the down payment. The most important part is to ensure that your existing property closes and you have the necessary funds in your bank account before closing your new property. Otherwise, a short term loan may be required. These typically have very high interest rates.
5. Borrowed Down Payment: Certain lenders may allow you to borrow your down payment, but it's typically not recommended because it adds to your debt. This is a very uncommon source.

Regardless of the source, lenders will want to verify the down payment 30 to 90 days before the purchase of a home, so you'll need to provide bank statements, RRSP statements, or other documentation showing where the money came from.

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How down payments affect mortgage payments and interest over time

Impact on Mortgage Payments

The most direct impact of your downpayment is on the size of your mortgage and consequently, your monthly payments. The larger your downpayment, the smaller your mortgage loan will be. For instance, if you purchase a $500,000 home with a 20% downpayment, you'll need a mortgage for $400,000. However, if you only put down 5%, your mortgage will be $475,000. This difference significantly affects your monthly payments, making them higher in the case of a smaller downpayment.

Impact on Interest Over Time

In addition to higher monthly payments, a smaller downpayment will also lead to more interest paid over the life of the loan. This is because the interest on your mortgage is calculated based on the outstanding loan balance. A higher loan amount means there is more balance for the interest to be applied to, increasing the total amount of interest paid over time. This difference can amount to tens of thousands of dollars over the lifespan of a typical mortgage term.

Furthermore, in Canada, if your downpayment is less than 20% of the home price, you'll need to pay for mortgage default insurance, commonly referred to as CMHC insurance. This insurance can add a significant amount to your mortgage loan, and subsequently, the interest you pay.

Determining the Size of Your Downpayment

Deciding how much downpayment to put down isn't always straightforward and will depend on your financial circumstances and goals. Here are a few things to consider:

1. Affordability: The first consideration is how much you can realistically afford without overstretching your budget or depleting your savings. Remember, it's important to keep some savings aside for emergencies and unexpected home costs. You can also check out how much you can afford using our affordability calculator.
2. Mortgage Default Insurance: If possible, it's beneficial to aim for a downpayment of 20% to avoid the extra cost of CMHC insurance. This can save you a significant amount of money over the term of your mortgage.
3. Market Conditions: In competitive real estate markets, a larger downpayment could make your offer more attractive to sellers, increasing your chances of securing the home you want.
4. Long-term Interest Savings: Consider the impact on your total interest over time. If you can afford to put down a larger downpayment, you could save a significant amount in interest over the long run.

Remember, everyone's situation is different, so it's essential to evaluate your own circumstances and consult with a mortgage professional or financial advisor to make the decision that's right for you.