Down Payment Requirements When Purchasing a House
If you’re thinking of purchasing a home then it is very important to understand what a down payment is and how it works. This blog goes through all of the basics of a down payment, along with minimum down payment requirements. We also review frequently asked questions to help you make a decision on how much to put towards your purchase.
1. What is the minimum down payment in Canada?
The rules for the minimum down payment in Canada are as follows: (Updated 2019)
- If the purchase price is less than $500,000, the minimum down payment is 5%.
- If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000, and 10% of any amount over $500,000.
- If the purchase price is $1,000,000 or more, the minimum down payment is 20%.
Keep in mind that the minimum down payment is subject to the lender’s approval, and that they may request more if you have a poor credit history or are self-employed. Additionally, the minimum down payment is usually preferred to come from your own funds, but may be gifted or taken as a part of the Home Buyer’s Plan or First Time Home Buyer Incentive as discussed later in this blog.
2. How to Calculate Your Minimum Down Payment
Example Minimum Down Payment BC #1: A home that is worth $500,000
- The minimum down payment is 5% for this bracket; therefore, numerically the minimum down payment on a $500,000 purchase price is $25,000.
Example Minimum Down Payment BC #2: A home that is worth $900,000
- Therefore, on $900,000 purchase, you would pay $25,000 to cover the minimum for the 1st $500K, and then $50,000(10%) for the amount between $500,000 and $1M (10% of $400,000).
- Total $65,000 as a minimum down payment for a home purchased for $900,000.
Example Minimum Down Payment BC #3: A home that is worth $1,200,000
- For example, on a purchase of $1,200,000, the down payment of 20% would be calculated on the entire balance – not on a sliding scale.
- Total minimum down payment in this scenario is $240,000.
Prior to this February 15, 2016 change, the rule of thumb was 5% for all properties regardless of the price. Thus, it is important to note that this has changed.
3. The size of your down payment & what it affects
The size of your down payment affects three main things:
- Your affordability and how much you can purchase
- The type of mortgage you get & whether you need to purchase mortgage default insurance
- Your monthly mortgage payment
a. If you put a minimum down payment it will affect your affordability
If you put the minimum down payment towards your purchase, then it means you will need to qualify for a larger amount of funds. Your down payment is a benchmark that is used to determine your maximum affordability. However, there are many other factors such as income, debt levels, credit score, and whether your are salary vs. self-employed that will also affect your affordability. Ultimately, the more you have in down payment the more you’ll be able to afford & the more likely it is for the lender to overlook hiccups in various other factors.
b. Your down payment affects your monthly mortgage payment
A larger down payment means that you need less money from the lender to fund the mortgage. As a result of this, the more you put down, the less you’ll pay in your monthly mortgage payment and interest. For some, putting the minimum amount down allows you to get in to the market rather than being priced out. If that’s the case for you, putting the minimum amount down is still OK – you just want to make sure that you can still afford your monthly mortgage payment.
c. If you put a minimum down payment it will determine the amount of CMHC insurance premium you pay
Mortgage loan insurance is a type of insurance premium that is charged by the mortgage lender in the case that you default on your mortgage payment, as buyers that put less money down are considered riskier in the lender’s eyes. The amount of down payment that you put towards your purchase will determine whether you are a high-ratio mortgage (less than 20% down) or a conventional mortgage (more than 20% down).
If you are putting the minimum amount down, and are purchasing a property that is less than $1,000,000, then you will be considered a high-ratio mortgage (less than 20% down) and be required to have mortgage default insurance. Usually, mortgage default insurance premiums range between 0.6% and 4.50% of the mortgage amount. This premium can be paid as a lump sum at the time of purchase, or added to the principal amount of your mortgage and paid regularly when you make your mortgage payments. If it is is added to your principal amount then you will also be paying interest on your premium.
If you’re looking to find premiums based on your down payment amount you can check out the 3 mortgage insurers that we have in Canada:
4. The Down Payment Process & When It’s Due
The down payment is an amount of money that the buyer pays towards their purchase, while the rest of the purchase price is funded by a mortgage lent by a bank to be repaid over a period of time. The down payment is due at the time that the property completes.
5. The Deposit Forms a Part of Your Down Payment
If a real estate purchases completes as planned, the deposit is then credited towards the purchase price and forms a part of the down payment. Therefore, is it a part of the down payment, but they are not the same thing and are paid at different times. An example of how the deposit forms a part of the down payment is:
- Purchase price $550,000
- Accepted offer on June 1st, Subject removal June 7th, Completes July 15th
- Deposit of 5% of purchase price ($25,000) due on June 8th (within 24 hours of subject removal)
- Minimum down payment required is 5% on $500,000 and 10% on remaining $50,000 of purchase price = $30,000
- Buyer decides to put minimum down payment of $30,000
- $30,000 total down payment funds required – $25,000 deposit already paid = $5000 remaining down payment due at completion on July 15th
6. Home Buyer’s Plan
In Canada we have a program called the Home Buyers Plan where you can withdraw up to $25,000 tax free from your Registered Retirement Savings Plan (RRSP) to go towards buying or building a qualifying homes. Keep in mind that if you withdraw that amount, the government requires that you put the same amount back in to your RRSP within 15 years. If you don’t repay the full amount within 15 years, then you will be taxed on the withdrawn funds. Therefore, before taking money out of your RRSP make sure that you consider if you’ll be able to make the repayments over the course of 15 years, and if withdrawing those funds will impact your retirement savings.
7. First time home buyer incentive
As of 2019, the Government of Canada has introduced a shared equity mortgage plan called the first time home buyer incentive.
A shared equity mortgage is where the government offers you financing without interest, which aids in reducing your monthly mortgage payment without having to increase the down payment amount.
The amount that the Government contributes as a part of the First Time Home Buyer Incentive depends on the type of home you are purchasing:
- 5% of the purchase price of an existing home
- 5% or 10% of the purchase price of a newly constructed home
You need to repay the incentive after 25 years, or when you sell the property. You can also repay it at any time without a pre-payment penalty.
The equity is shared and so is the gain or loss in value; therefore the repayment is based on the property’s fair market value at the time of repayment. If the value of the home goes up when sold or after 25 years then the 5-10% is based on the higher number, if the value of the home goes down then the percentage is based on the lower number.