Let’s Look at How Much Is the Down Payment for A House in Canada
Buying a home ranks high among the major life decisions for most people. It can be an exciting process, and the feeling of living in your own “Home Sweet Home” is indescribable.
Like other big decisions, it must be a well-thought-out plan that considers your income, lifestyle and expenses. The actual process starts well before you consider looking for the “right house” – you need to sort out your finances and decide on the amount you can afford to pay upfront. You then shop for the best mortgage rates and get pre-approval, if possible.
And finally, you have a number in mind – the amount of money you can afford to pay for a house in Canada. This will help narrow down the choices, be it the type of house, location, or amenities. And then begins the house hunting process.
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The Mortgage System
A mortgage is a loan from a lender to help pay for your home. A legal contract between you and your lender specifies the details, and the mortgage loan is always secured on a property. Several types of mortgages are available for homebuyers in Canada, such as open and closed mortgages, fixed and variable rate mortgages, and low and high ratio mortgages – to name a few. It would be best if you shopped around for an option that suits you best.
Mortgage lenders use several factors to determine the loan and payment details. Your assets and income will be verified as well as expenses and any outstanding debts. They will also confirm that the property you are buying meets their standards.
In the Canadian mortgage system, the home buyer pays a sum upfront – a portion of the purchase price. A mortgage covers the rest of the price of the home, and the homebuyer pays back the mortgage lender over a period of years with interest.
When you make a mortgage payment, your money goes toward the interest and principal. The principal is the loan amount you borrowed from the lender. You pay interest to the lender on the loan as a fee, per the mortgage rate.
What is Down Payment?
The lump sum payment a homebuyer makes when buying a home is called a down payment. The down payment can be from your savings account or retirement savings, the sale of a property, or a non-repayable financial gift from a close relative.
Typically, a homebuyer can pay only a part of the purchase price as a down payment, with the rest of the money made up by a mortgage. According to the Canadian mortgage system, you cannot qualify for a mortgage without a down payment.
Of course, if you have more money, you can pay bigger down payments or buy your home outright.
Are Down Payment and Deposit the Same?
No, a down payment is not the same as a deposit. A deposit is a smaller sum of money that proves to the seller that you are a serious investor. Once the deal is completed, the deposit amount can form a part of your down payment.
How Much Down Payment Do You Need?
The down payment on a house in Canada is a percentage of the purchase price of your home. Simply speaking, the higher your home’s purchase price, the bigger the down payment size.
The down payment is deducted from the purchase price of your home and will determine how much you need to borrow. A larger down payment gets you a better interest rate and a smaller monthly mortgage payment. On the other hand, a smaller down payment affects interest rates and mortgage payments, with the additional costs of mortgage loan insurance AKA mortgage default insurance.
In 2021, the average down payment for a home in Canada ranged from about 22% in British Columbia to just below 15% in Quebec. With the average home price in Canada hovering around the $ 700,000 mark, this means a typical down payment is above $ 100,000. It is a good idea to set up a down payment fund as soon as you can, where you can save money exclusively for buying a house.
Minimum Down Payment
The minimum down payment is based on the purchase price of your home.
- If the home purchase price is $500,000 or less, you will have to pay 5% of the purchase price as the minimum down payment.
- If the purchase price is between $500,000 and $999,999, the minimum down payment required is 5% of the first $500,000 plus 10% for the portion of the purchase price above $500,000.
- For example, your new home costs $750,000. The minimum down payment is 5% of $500,000 plus 10% of the remaining $250,000 ($25,000 + $25,000 = $50,000).
- If your new home costs $1 million or more, the minimum down payment is 20% of the total purchase price.
Strictly speaking, there is no maximum limit to the down payment. However, it would be best if you aimed to pay a bigger down payment, as much as possible.
Remember, as per Canadian law, mortgage lenders have their own mortgage eligibility and down payment requirements, and these are just the bare minimum down payments. If you’re self-employed or have a poor credit history, your lender may require a higher down payment.
When Do You Purchase Mortgage Default Insurance?
If you pay a down payment of less than 20% of the price of your home, you have to purchase mortgage loan insurance. As per CHMC regulations, mortgage insurance is available only for properties with a purchase price or as-improved/renovated value below $1,000,000.
Mortgage loan insurance, sometimes called CMHC Mortgage Insurance (Canada Mortgage and Housing Corporation Insurance), protects the mortgage lender from borrower defaults.
It also allows homebuyers to pay a lower down payment amount. Mortgage lenders are more willing to accept a minimum down payment, (as small as 5%) if you get CMHC insurance. You can also qualify for a high-ratio mortgage, which generally has lower mortgage rates when compared to uninsured mortgages.
Insurance Premium
You will have to pay the CMHC insurance premium, ranging from 0.6% to 4.00% of the total mortgage. You can use a mortgage loan insurance calculator to help you determine how much your premiums will cost. You must also pay provincial sales tax if your home is in Ontario, Quebec, Manitoba, and Saskatchewan.
Uninsured Mortgage Loan
If you do not get mortgage loan insurance or CMHC insurance, you must make a down payment of at least 20% of the price of the home. However, depending on the state of your finances, some mortgage lenders may require you to get mortgage loan insurance even if you make a down payment greater than 20%,
Assistance with Down Payment
The Canadian government has several programs to assist homebuyers with the down payment on a house. You can check whether you qualify for one of these incentives and tax rebates. A few of the most popular are mentioned below.
The Home Buyers’ Plan – Allows you to withdraw up to $35,000 (tax-free) in a calendar year from your registered retirement savings plan.
The First-Time Home Buyer Incentive – Helps first-time homebuyers to finance a portion of their home purchase through a shared equity mortgage with the Government.
The Home Buyers’ Amount – Offers a $5,000 non-refundable income tax credit amount.
Concluding
A down payment is the amount of money you pay upfront when you buy a house.
The down payment depends on the purchase price of your home. There are additional costs such as legal fees, home appraisals and inspections, closing costs, mortgage payments etc. that you shall have to include in your home-buying budget.
This article also tells you how a mortgage down payment influences the interest rate and monthly mortgage payments. Though you can use a mortgage payment calculator to help figure out the amount and schedule of the monthly payment, you are advised to talk to a Realtor who can guide you.
It is a good idea to research the average price of a home in your preferred location, and if you can afford it, save for a large down payment amount. On the other hand, you can pay a smaller down payment, though you must educate yourself about the process and all the costs involved.
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