The Greenhouse
by Pine

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

A a larger down payment means you’re borrowing less money.

How much you offer really can impact your mortgage.

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.

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.

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.

While there’s a silver lining knowing that, depending on your price point, you won’t have to fork over an automatic 20% down payment, it’s important to note that if you do give less than 20% you will need to get mortgage insurance to qualify. 

Does your down payment impact your mortgage? 

You might not have known this, but mortgage rates can change depending how much down payment you have available.

When you have less than a 20% down payment

According to the Canada Mortgage and Housing Corporation, a mortgage with less than 20% is considered “high ratio.” If the house you’re purchasing is less than $1 million, you’ll need to also get mortgage insurance with this down. In this situation, mortgage insurance doesn’t protect you, but instead protects the lender in case you’re unable to make your payments. 

While this will add premium payments to your monthly mortgage costs, lenders are more willing to offer some of the best–and in most cases lower–interest rates. 

When you have a 20% down payment

While you might avoid paying mortgage insurance when you offer a minimum 20% down payment, because the lender isn’t protected by the CMHC if you stop making your payments, there is a bit more risk for said lender. That’s why, in this situation, rates are just slightly higher with this down payment. 

When you have 35% or more of a down payment

The higher your down payment is, the lower your lender risk goes, putting you closer towards the mortgage rates seen for “high ratio” purchases. For some lenders, 25% down payment gets you very close to their lowest rates, while others require 35%. 

How do you decide if you should put down a larger or smaller down payment? 

Why you should opt for a larger down payment

Overall, a larger down payment means you’re borrowing less money, which means you’ll pay less in total interest costs over your mortgage’s lifetime. Not only does saving for a larger down payment help you save overtime, it also offers you: 

  • Smaller monthly payments: Borrowing less money, means you’re paying back a lower amount. Low monthly payments can definitely make your life easier, especially if your wallet needs a little wiggle room for unforeseen circumstances like a job loss, or large surprise expense.
  • Lower rates: As mentioned, the higher your down payment, the lower your interest rates could be. 
  • No mortgage insurance: You’ll also save by avoiding having to add mortgage insurance into your monthly payments, as premiums. 
  • Future borrowing power: Thinking you might need more loans or credit in the future? Having a lower mortgage means you’ll also have a lower monthly debt-to-income (DTI) ratio–which compares how much debt you have, compared to how much money you make. Having a lower DTI ratio–usually below 36%–looks good in the eyes of lenders and/or banks. 
  • Potential equity: The larger your down payment, the more equity you’re putting in your home. If you put down 25% down payment, you now own 25% of your home right off the bat, versus only 5% or 10%. With more equity in your home, the more you’ll be able to potentially borrow against with a home equity line of credit, in the future. 

Why you should opt for a smaller down payment

Obviously the best pro about a smaller down payment is that you don’t have to save up as much, making it possible for you to:  

  • Buy sooner: For a lot of people, saving up for a 20% down payment can take a long time–which could look like years, or even decades. Having a smaller down payment means you might be able to get your dream home–or at least your first home–sooner than later.  
  • Have emergency funds or cash for other priorities: Let’s say you do have enough for 20%–giving up all of your savings can sometimes feel overwhelmingly scary. What if there’s an emergency? What if something happens–like a health scare or your car breaking down–where you need money ASAP? Giving a smaller down payment means you can still split your savings by investing part into a home, and the other part can stay in your account as emergency funds. And in other instances, sometimes you just want to keep your cash in your retirement savings or towards something else, like a business or stocks 
  • Have money to pay for renovations: Keeping some of the cash on hand means you can put it towards potentially giving your space a facelift to turn your house into a home. 

Strategies for Saving for a Down Payment

Saving for a down payment on a home can be a challenging yet rewarding journey. With the right strategies, you can accumulate the necessary funds more efficiently. Here are some practical tips to help you on your path to homeownership.

Set a Clear Savings Goal

Start by determining the exact amount you need for your down payment. This will depend on the price range of homes you're considering and the minimum down payment required. Once you have a target amount, break it down into smaller, manageable monthly savings goals.

Automate Your Savings

Set up an automatic transfer to a dedicated savings account each time you receive your paycheck. This "pay yourself first" approach ensures that you consistently save without the temptation to spend.

Utilize a High-Interest Savings Account or TFSA

Place your down payment savings in a high-interest savings account (HISA) or a Tax-Free Savings Account (TFSA). These accounts offer higher interest rates than regular savings accounts, helping your money grow faster.

Explore Down Payment Assistance Programs

Research government programs and incentives for first-time homebuyers, such as the Home Buyers' Plan (HBP), which allows you to withdraw funds from your RRSPs tax-free to use as a down payment.

Consider a Side Hustle for Extra Income

If your current income makes saving challenging, consider taking on a side job or freelance work. The additional income can significantly boost your down payment savings.

At the end of the day, the down payment you offer has to make sense for you and the home you’re looking to buy. But if you need more help figuring out what’s best, our Pine mortgage experts are always here to help. Apply through our easy-to-use application and we’ll put you in touch with one of our agents to help you with your down payment questions and home-buying journey. 

While there’s a silver lining knowing that, depending on your price point, you won’t have to fork over an automatic 20% down payment, it’s important to note that if you do give less than 20% you will need to get mortgage insurance to qualify. 

Does your down payment impact your mortgage? 

You might not have known this, but mortgage rates can change depending how much down payment you have available.

When you have less than a 20% down payment

According to the Canada Mortgage and Housing Corporation, a mortgage with less than 20% is considered “high ratio.” If the house you’re purchasing is less than $1 million, you’ll need to also get mortgage insurance with this down. In this situation, mortgage insurance doesn’t protect you, but instead protects the lender in case you’re unable to make your payments. 

While this will add premium payments to your monthly mortgage costs, lenders are more willing to offer some of the best–and in most cases lower–interest rates. 

When you have a 20% down payment

While you might avoid paying mortgage insurance when you offer a minimum 20% down payment, because the lender isn’t protected by the CMHC if you stop making your payments, there is a bit more risk for said lender. That’s why, in this situation, rates are just slightly higher with this down payment. 

When you have 35% or more of a down payment

The higher your down payment is, the lower your lender risk goes, putting you closer towards the mortgage rates seen for “high ratio” purchases. For some lenders, 25% down payment gets you very close to their lowest rates, while others require 35%. 

How do you decide if you should put down a larger or smaller down payment? 

Why you should opt for a larger down payment

Overall, a larger down payment means you’re borrowing less money, which means you’ll pay less in total interest costs over your mortgage’s lifetime. Not only does saving for a larger down payment help you save overtime, it also offers you: 

  • Smaller monthly payments: Borrowing less money, means you’re paying back a lower amount. Low monthly payments can definitely make your life easier, especially if your wallet needs a little wiggle room for unforeseen circumstances like a job loss, or large surprise expense.
  • Lower rates: As mentioned, the higher your down payment, the lower your interest rates could be. 
  • No mortgage insurance: You’ll also save by avoiding having to add mortgage insurance into your monthly payments, as premiums. 
  • Future borrowing power: Thinking you might need more loans or credit in the future? Having a lower mortgage means you’ll also have a lower monthly debt-to-income (DTI) ratio–which compares how much debt you have, compared to how much money you make. Having a lower DTI ratio–usually below 36%–looks good in the eyes of lenders and/or banks. 
  • Potential equity: The larger your down payment, the more equity you’re putting in your home. If you put down 25% down payment, you now own 25% of your home right off the bat, versus only 5% or 10%. With more equity in your home, the more you’ll be able to potentially borrow against with a home equity line of credit, in the future. 

Why you should opt for a smaller down payment

Obviously the best pro about a smaller down payment is that you don’t have to save up as much, making it possible for you to:  

  • Buy sooner: For a lot of people, saving up for a 20% down payment can take a long time–which could look like years, or even decades. Having a smaller down payment means you might be able to get your dream home–or at least your first home–sooner than later.  
  • Have emergency funds or cash for other priorities: Let’s say you do have enough for 20%–giving up all of your savings can sometimes feel overwhelmingly scary. What if there’s an emergency? What if something happens–like a health scare or your car breaking down–where you need money ASAP? Giving a smaller down payment means you can still split your savings by investing part into a home, and the other part can stay in your account as emergency funds. And in other instances, sometimes you just want to keep your cash in your retirement savings or towards something else, like a business or stocks 
  • Have money to pay for renovations: Keeping some of the cash on hand means you can put it towards potentially giving your space a facelift to turn your house into a home. 

Strategies for Saving for a Down Payment

Saving for a down payment on a home can be a challenging yet rewarding journey. With the right strategies, you can accumulate the necessary funds more efficiently. Here are some practical tips to help you on your path to homeownership.

Set a Clear Savings Goal

Start by determining the exact amount you need for your down payment. This will depend on the price range of homes you're considering and the minimum down payment required. Once you have a target amount, break it down into smaller, manageable monthly savings goals.

Automate Your Savings

Set up an automatic transfer to a dedicated savings account each time you receive your paycheck. This "pay yourself first" approach ensures that you consistently save without the temptation to spend.

Utilize a High-Interest Savings Account or TFSA

Place your down payment savings in a high-interest savings account (HISA) or a Tax-Free Savings Account (TFSA). These accounts offer higher interest rates than regular savings accounts, helping your money grow faster.

Explore Down Payment Assistance Programs

Research government programs and incentives for first-time homebuyers, such as the Home Buyers' Plan (HBP), which allows you to withdraw funds from your RRSPs tax-free to use as a down payment.

Consider a Side Hustle for Extra Income

If your current income makes saving challenging, consider taking on a side job or freelance work. The additional income can significantly boost your down payment savings.

At the end of the day, the down payment you offer has to make sense for you and the home you’re looking to buy. But if you need more help figuring out what’s best, our Pine mortgage experts are always here to help. Apply through our easy-to-use application and we’ll put you in touch with one of our agents to help you with your down payment questions and home-buying journey. 

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