The required down payment on a house ranges from 5% to 20% of the purchase price. You can also opt to put more than 20% down if you prefer.
What is a Down Payment?
A down payment is a lump sum of money you pay upfront when purchasing a home.
Your lender subtracts this amount from the property’s selling price and provides you with a mortgage to cover the balance.
Minimum Down Payments
In Canada, you’re required by law to contribute a minimum down payment, which varies according to your home’s purchase price.
The down payment threshold is divided into three tiers:
- Home price under $500,000. You must put down 5% of the purchase price.
- Home price between $500,000 and $999,999. You must put down 5% on the first $500,000 and 10% on the portion above $500,000.
- Home price of $1 million or higher. You must put down 20% of the purchase price.
Below is a table that shows the amount of money you’d have to put down based on the property’s sales price:
|Down Payment Required||$18,750||$50,000||$300,000|
Does the Size of Your Down Payment Affect Your Mortgage?
The amount you contribute as a down payment substantially impacts your mortgage.
Here are some of the factors to consider before you decide on how much to put down:
A large down payment may help you secure a lower interest rate on your mortgage.
The reason is that you need to borrow a smaller sum of money to finance the balance, which means the chance of default is lower.
As a result, your lender will be more inclined to reward you with a favourable rate since they bear less risk in extending credit to you.
Conversely, with a small down payment, the risk of you failing to make timely mortgage payments rises.
Your lender may elect to offset the higher likelihood of default by setting you up with a higher rate.
There is a caveat however with smaller down payments covered in the next point.
Mortgage Loan Insurance
Mortgage loan insurance acts to protect your lender should you default on your payment obligations.
However, rather than your lender purchasing it, the cost is borne by you.
In Canada, you’re responsible for buying mortgage loan insurance if your down payment amounts to less than 20% of your home’s purchase price.
The primary issuer of mortgage loan insurance is the Canada Mortgage and Housing Corporation (CMHC).
The cost of mortgage loan insurance is determined as a percentage of your total mortgage principal.
The rate ranges from 0.60 – 4.50%, depending on the size of your mortgage relative to your home’s purchase price.
Interest rates on mortgages with loan insurance are typically some of the lowest as the risk of default to the lender is covered by the loan insurance.
You can expect higher monthly payments if you put down a small down payment rather than a large one and vice versa.
Naturally, your payment schedule will demand larger payments each month to pay off an $800,000 mortgage than for only $350,000, regardless of the length of your amortization period.
Pros of a Large Down Payment
Lower Monthly Payments
A sizable down payment translates to lower monthly mortgage payments, which will put less of a strain on your budget.
You can also realize immense savings on interest charges.
No mortgage loan insurance required
As noted above, the amount you pay for mortgage loan insurance is calculated based on your total mortgage.
By putting in a large chunk of money toward your home as a down payment, you’ll face a relatively small mortgage loan insurance bill.
If you contribute 20% or more, you’re absolved from paying this extra cost entirely.
A large down payment may increase your chances of closing a deal on the home you’re looking to acquire.
It signals to the seller that you’ll face little difficulty securing the financing you need to complete the purchase, giving them the confidence to accept your asking price.
Cons of a Large Down Payment
Amassing the funds necessary for a massive down payment can be a formidable task.
It can take many years of disciplined saving to hit your target amount.
The process may entail cutting back on vacations, hobbies, dining out, and other fun activities.
Fewer funds available to invest elsewhere
Suppose you’ve drained your savings account to cover your down payment.
In that case, you’ll have little money left over to invest in stocks, bonds, commodities, and other investment products.
No guarantee of a favourable mortgage contract
While a higher-than-average down payment could net you favourable mortgage terms, there aren’t any guarantees.
For example, your lender may not reward you with a discounted rate if your down payment exceeds 20%, as the lack of mortgage loan insurance leaves them exposed to a significant loss if you default.
Your lender may also require that you obtain mortgage loan insurance if you have an irregular income, regardless of if you hit the 20% threshold.
Did You Know
If you lack the funds needed for a down payment, you can obtain a loan through a borrowed down payment program, such as the one offered by Sagen, to cover the balance.
Pros of a Small Down Payment
Easier to purchase a home
Contributing a modest down payment can enable you to buy a home earlier, as you need less time to collect the necessary money.
You also get the benefit of building up your home equity much sooner.
More money leftover
Opting for a small down payment leaves you with more funds to spend and invest elsewhere.
You can contribute money to your savings account, increase your children’s education fund, diversify your investment portfolio, or finally take your next vacation.
Missed homebuying opportunities
Collecting money for a large down payment isn’t always the most financially savvy move.
In some cases, you’d be better off purchasing a home with the bare minimum necessary.
For example, if the economy is in a recession, you may be able to snag a property at a deeply discounted price.
Cons of a Small Down Payment
Larger monthly payments
A small down payment results in a larger mortgage, which means you can anticipate larger monthly payments.
Depending on your cash flow and budget, this can be a financial burden on your household.
Smaller profit following the sale of your home
Building substantial home equity can take a considerable amount of time if your mortgage principal is high relative to your home’s appraised value.
Should you sell your home after a brief period, you’ll realize less profit, if any at all, as most of the proceeds will go toward paying off your mortgage balance and closing costs.
Less opportunity to leverage your home equity
A meagre down payment will leave you with little home equity right off the bat since you’ll need a sizable mortgage to finance your purchase.
As a result, you’ll have less opportunity to obtain a home equity line of credit (HELOC) or apply for a cash-out refinance.
Lenders prefer to offer a line of credit or refinancing to a homeowner who has built up at least 20% equity in their home.
How Much Money Should I Put Down For My House?
The amount you should contribute as a down payment will depend on your goals, budget, and preferences based on your circumstances.
In general, you should strive to put down as much money as possible if your chief concern is keeping your mortgage payments low.
You’ll be able to accumulate home equity rapidly and pay off your mortgage sooner, as well.
However, not everyone has the financial means to assemble a large sum of money for a down payment.
A more reasonable amount will suffice, especially if you can acquire a property at a good price and don’t have many other debt obligations to grapple with.
Also, if your budget can accommodate larger mortgage payments, a small down payment can work to your advantage.
You can allocate your remaining funds to other assets, thereby expanding your investment portfolio.
Frequently Asked Questions
- Is a down payment refundable?
In general, a down payment is non-refundable.
The reason is that a down payment is inextricably linked to the purchase agreement. Once you sign your name on the bill of sale, you’re legally obligated to buy the home.
- Why is down payment important?
A down payment is vital for both legal and practical reasons.
Canadian law stipulates that you must put down a minimum amount of money upfront toward a property purchase.
The down payment also influences your mortgage size and the interest rate your lender assigns to it. In general, the higher your down payment, the smaller the mortgage you’ll need to undertake. You could also secure a lower rate. Since a mortgage is often a multi-decade commitment, it’s essential to consider how your down payment will affect your overall financial situation.