How Much Do I Need For A Down Payment To Buy A House?

Very rarely do people have the cash to buy a house in full. Most borrowers must put money down on a home to purchase it, known as a down payment. Lenders make up the difference with a mortgage loan, using your new home as security until your mortgage is paid off. Many borrowers qualify to put down less than 20% on a home but must pay mortgage insurance.

When you put more than 20% down, this insurance is not mandatory. Understanding how mortgage insurance works and whether you should make a 20% down payment is very important when buying a home.

How Much Must you Put Down?

All borrowers have a minimum amount they must put down on a home. You are always free to make a larger down payment but must meet the minimum to qualify. The minimums are as follows:

• Sales price $500,000 or less = 5% down payment
• Sales price $500,000 – $999,999 = 5% down on the first $500,000 and then 10% on any amount over $500,000
• Sales price of $1 million or more – 20% down payment

Keep in mind that just because you have the minimum down payment, doesn’t always mean you qualify. There are many other factors that lenders consider, such as your income, employment history, savings, debts, credit score & history, and much more.

Paying Mortgage Insurance

You’ll pay mortgage insurance if you don’t put down at least 20% on a home. This insurance protects the lender should you stop making your payments. However, you are responsible for the premiums, and lenders can require mortgage insurance even with a 20% down payment if you have bad credit or are self-employed because you are still a high risk of default. This insurance gets added to your mortgage and isn’t required to pay out of pocket. Here is a great calculator by CMHC to determine your potential premiums and mortgage payment: CMHC Mortgage Calculator

There are three companies that provide this insurance to Canadians, CMHC, Canada Guaranty and Sagen. They all offer the same premiums but some have different programs & policies.

How a Down Payment Affects your Mortgage Payment

The more money you put down on a home, the lower your mortgage payment will be because you borrow less to buy the house.

In addition, the more money you put down, the less you’ll pay in mortgage insurance because you have more invested in the home. So if you can meet the 20% down payment requirement, you’ll have the lowest mortgage payment because you won’t pay mortgage insurance (in most cases).

Homebuyer Assistance Programs

If you don’t have 20% to put down, or enough to qualify for a mortgage, there are a couple of plans that may help.

Homebuyer’s Plan (HBP)

The Homebuyer’s Plan allows up to a $35,000 withdrawal from your Registered Retirement Savings Plan. In addition, you won’t pay taxes on the amount you withdraw as long as you repay the amount within 15 years.?

Before withdrawing from your RRSP, make sure it won’t affect your long-term retirement plans, especially if you’re nearing retirement.

First-Time Homebuyer Incentive

If you’re a first-time homebuyer, you may be eligible for a shared equity mortgage with the Canada Government.

This financing is interest-free and has a 25-year repayment period. However, you can prepay it at any time and must repay if you sell the house before paying the loan in full.

The First-Time Homebuyer Incentive Program provides a 5% down payment on an existing home and 5% – 10% on a new construction home.

FHSA

The FHSA is a registered plan that allows you to save up to $40,000 in a tax-free account for your first home purchase. You can contribute up to $8,000 per year and deduct your contributions from your taxable income, similar to an RRSP. Any interest earned inside the plan is tax-free, and when you are ready to buy your first home, you can withdraw your savings tax-free, like a TFSA.

Final Thoughts

The down payment is one of the most important factors when buying a home. Lenders want to know how much you’ll invest, taking the risk off them. So it’s to your benefit to make a larger down payment to decrease your mortgage insurance premiums and interest costs. However, if you’re just starting out and this is your first or second home, it is very common to not have enough funds to reach a 20% down payment. This insurance is a benefit to those who have the minimum down payment and want to get into the real estate market right away.?

If you need help, don’t hesitate to reach out. I’m a qualified mortgage expert that can run the numbers for you and offer comparable scenarios to help you make your decision.

??BRX Mortgages, Originally written October 28th, 2022 and updated June 2023