How Much You Need for a Down Payment in Canada
When you’re buying a home in Canada, the down payment is one of the most significant financial considerations. The amount you need to save for a down payment directly impacts the size of your mortgage and, ultimately, the overall cost of homeownership. In this post, we’ll break down the basics of down payments, mortgage loan insurance, and how to ensure you’re prepared for your home purchase.
What is a Minimum Down Payment?
A down payment is the amount of money you pay upfront when purchasing a home. Your mortgage lender deducts the down payment from the overall purchase price of the home, and the mortgage loan covers the remaining cost.
In Canada, the minimum down payment you need depends on the purchase price of the home:
- For homes priced at $500,000 or less: the minimum down payment is 5% of the purchase price.
- For homes priced between $500,000 and $999,999: the minimum down payment is 5% of the first $500,000 and 10% of the portion above $500,000.
- For homes priced at $1 million or more: the minimum down payment is 20% of the purchase price.
If you are self-employed or have a less-than-ideal credit history, your lender may require a larger down payment.
Example: How to Calculate Your Minimum Down Payment
The amount of your down payment depends on the price of the home you want to purchase. Here are two examples to show how it works:
- If your home costs $400,000: The minimum down payment is 5%, or $20,000.
- If your home costs $600,000: You’ll need to pay 5% on the first $500,000, which is $25,000, and 10% on the remaining $100,000, which is $10,000. In total, you’ll need a down payment of $35,000.
What is Mortgage Loan Insurance?
If your down payment is less than 20% of the home’s purchase price, you’ll typically need to buy mortgage loan insurance (also known as mortgage default insurance). Mortgage loan insurance protects the lender in case you’re unable to make your mortgage payments. It does not protect you as the buyer, but it’s mandatory for loans with less than 20% down to mitigate the lender’s risk.
In some cases, even if you have a 20% down payment, your lender may still require mortgage loan insurance if you’re self-employed or have a lower credit score.
The Cost of Mortgage Loan Insurance
The fee for mortgage loan insurance is called a premium, and it’s calculated as a percentage of your mortgage. This percentage can range from 0.6% to 4.5%, depending on the size of your down payment. The bigger your down payment, the lower your premium.
Your lender will typically arrange the mortgage loan insurance for you, but you should be aware of the costs involved. You can pay the premium upfront or have it added to your mortgage. If you choose to add it to your mortgage, remember that you’ll also be paying interest on this premium at the same rate as your mortgage.
In provinces like Ontario, Quebec, and Manitoba, there’s also provincial sales tax on the mortgage insurance premium, which you must pay separately at the time of purchase. This tax cannot be added to your mortgage.
How the Down Payment Affects the Total Cost of Your Mortgage
The larger your down payment, the less you need to borrow, which can significantly reduce the amount of interest you’ll pay over the life of your mortgage. A larger down payment can also help you avoid the cost of mortgage loan insurance altogether.
Example: How the Down Payment Affects Mortgage Costs
Let’s look at a hypothetical home purchase of $400,000 with different down payment scenarios assuming the following:
- Interest Rate of 4% Throughout entire mortgage
- 25 Year Amortization
- Monthly Payments
- Mortgage loan insurance premium is added to the mortgage
| Down payment | Down payment amount | Mortgage | Mortgage loan insurance premium | Mortgage (includes insurance premium) | Total cost of your home (includes all columns) |
|---|---|---|---|---|---|
| 5% | $20,000 | $380,000 | $15,200 | $395,200 | $643,649 |
| 10% | $40,000 | $360,000 | $11,160 | $371,160 | $625,712 |
| 20% | $80,000 | $320,000 | Not required | $320,000 | $584,979 |
As you can see, the larger your down payment, the more you save in interest and insurance premiums over time.
Conclusion
Saving for a down payment is a key step toward homeownership, and understanding how the size of your down payment impacts your mortgage and overall costs is essential. The larger your down payment, the less you’ll pay in interest and insurance premiums, potentially saving you thousands of dollars in the long run. At Mortgages for Less, we can help guide you through the home-buying process and ensure you have all the information you need to make the best financial decision.
If you’re ready to take the next step toward owning a home, contact us today!
