How Much is a Down Payment on a House?
Have you ever wondered how much is a down payment on a house? How much you need to put down depends on the purchase price of the home.
Buying a home is a huge process with several steps and expenses to be aware of. You have the down payment, the monthly mortgage payments, and the closing costs. Not to mention any appliances or furniture or work the home might need when you move in. It all adds up really quickly, and while you can borrow money for a lot of it, you do need to have your down payment on hand to get started.
So, how much is a down payment on a house? What’s the minimum requirement? And how can you help save up enough to cover it? Read on for everything you need to know about down payments on a house.
What is a minimum down payment?
A down payment is a lump sum of money that you must put towards the purchase of your home. This is only a portion of the cost of the home, the rest is usually covered by a mortgage. However, there is always a minimum down payment requirement which will depend on the price of the home. In Canada, the minimum down payment requirements follows this schedule:
- For homes priced at $500,000 or less, the minimum down payment is 5%
- For homes priced between $500,000-$999,999 it’s 5% for the first $500,000 then 10% for the remaining portion
- For homes priced at $1 million and above the minimum down payment is 20%
Example 1: Your home’s purchase price is $500,000. This means you will need a minimum of 5% for your down payment. The down payment amount on this home will have to be at least $25,000.
Example 2: Your home’s purchase price is $1,200,000. This means you will need to have a minimum of 20% for your down payment. The down payment amount on this home will have to be at least $240,000.
Note that while these are typical down payments, it also depends on the borrower’s financial circumstances. Individuals who are self-employed or have a poor credit history may be required by the lender to have a higher down payment.
While there is a minimum down payment requirement when buying a home, there is no maximum. It also doesn’t matter if you’re first-time homebuyers or a real estate investor, the down payment requirements are the same.
Most people will save money for their down payment, but it’s also perfectly legal to get your down payment from family. If you’re getting gift money from your parents or family, be sure to get a mortgage gift letter.
Having a higher down payment can be incredibly beneficial in terms of being approved for a mortgage, saving money over time on interest payments, and helping to avoid mortgage loan insurance.
What is mortgage loan insurance
So, what is mortgage loan insurance? Mortgage loan insurance (sometimes referred to as mortgage default insurance) generally comes into play when borrowers have a down payment of less than 20%. In these situations, you have a high-ratio mortgage. The lender sees this as a higher risk and wants added protection in case you default on your payments.
While mortgage loan insurance is usually reserved for individuals whose down payments are under the 20% threshold, there are some situations where individuals with 20% or more will still be required by their lender to get mortgage loan insurance. This is typically in cases where the borrower has a poor credit history or works as a freelancer, or is self-employed. These situations could still be deemed risky investments and require insurance.
Should you require mortgage loan insurance, your mortgage lender will help coordinate it for you. Note that you cannot get mortgage loan insurance if the purchase price of the home is over $1 million or if the loan doesn’t meet the mortgage insurance company’s standards.
Cost of mortgage loan insurance
Now that you know how much is a down payment on a house is, you need to know about mortgage insurance. The cost of mortgage loan insurance, referred to as your mortgage insurance premium, varies between 2.8% and 4% depending on the size of your down payment. The larger your down payment, the lower the rate.
This premium is usually added to your mortgage but can also be paid as a lump sum upfront. Keep in mind that if you do add it to your mortgage, you will pay interest on the premium at the same rate that you pay for your mortgage. While it’s not ideal to have something else to pay interest on, the lump sum can be pretty hefty to pay upfront when considering all the other costs, even if you are on the lower end.
Using the example from earlier, if you have a $500,000 home and your rate is 2.8%, that’s still $14,000. If you could afford to pay that upfront, it would likely be better put towards the down payment.
Mortgage insurance providers
There are three mortgage insurance providers in Canada.
The most common one is the Canadian Mortgage and Housing Corporation or CMHC for short. You may see mortgage loan insurance referred to as CMHC insurance because they are by far the most popular mortgage insurance provider in Canada. Your other two options are Canada Guaranty Mortgage Insurance Company and Sagen (formerly Genworth Financial), both of which are private mortgage insurance companies.
Is needing mortgage loan insurance a bad thing?
Oftentimes we associate mortgage loan insurance with being a bad thing. After all, it is an additional cost that you are adding to your mortgage because you are seen as a risk for not having a large down payment. However, it’s worth noting that borrowers who have mortgage loan insurance oftentimes get better interest rates on their mortgage than individuals who don’t need mortgage loan insurance. This is because once you have insurance, the lender sees you as a safer option than individuals who don’t. So, while it is ideal to have a larger down payment on your home for several reasons, it’s really not the end of the world if you end up needing mortgage loan insurance.
Programs to help new home buyers
Buying a new home is expensive. You have the down payment, the possibility of mortgage loan insurance, and don’t forget all the closing costs. However, if you are a new home buyer there are some programs and incentives to help alleviate some of the financial stress of purchasing your first home.
Home Buyers’ Plan
First up is the Home Buyers’ Plan, which allows first-time home buyers to borrow some of the money from their RRSP to use it towards the down payment on a home. A single individual can withdraw up to $35,000 from their RRSP, but if you’re purchasing the home as a couple, you can both take advantage of the Home Buyers’ Plan, which means you can have a total of up to $70,000 to put towards your down payment.
Of course, there are several stipulations in place to be able to use this strategy, and you do need to be able to pay it back in full over the course of 15 years. If you are unable to do this properly, you will be taxed on the money you withdrew. The Home Buyers’ Plan can be handy for some individuals but not everyone.
First-Time Home Buyer Incentive
The First-Time Home Buyer Incentive is a new government program aimed at first-time buyers who need some extra help purchasing their home. With this program, the Canadian government will provide you with 5-10% of the cost of your home to add to the down payment. Which, yes, is a pretty significant amount when some homes only require a 5% down payment to start with.
How much you get depends on what type of home you are purchasing. The breakdown is as follows:
- 5% or 10% for the purchase of a newly constructed home
- 5% for the purchase of a resale home
- 5% for the purchase of a new or resale mobile/manufactured home
Keep in mind that the money needs to be paid back eventually, and the government has equity in your home.
Tax-Free First Home Savings Account
Announced in 2022, the Tax-Free First Home Savings Account will be available to Canadians in 2023. This incentive provides first-time home buyers with a savings account that combines a TFSA and RRSP.
The goal of this account is to help first-time home buyers purchase their first home. Individuals who use this savings account can save up to a maximum of $40,000 which can then be used to purchase a single-family home. There is a contribution limit of $8,000 annually, but unused space carries forward.
This is a tax-free account, so you won’t pay taxes or capital gains on earned interest. Contributions are also tax-deductible. Funds do not need to be paid back, but the account must be closed within 1 year from the first withdrawal. This account is specifically meant for homeowners. The money cannot be used towards purchasing a second home or an investment property.
How to save for a down payment
Knowing how much is a down payment on a house is just one question. You also need to know how to save for one. As you can see from our examples at the beginning, a down payment on a home is a substantial chunk of money. Most of us don’t have that kind of money just lying around, so here are a few ways to help save for a down payment.
Automate your savings
Consider building some down payment savings into your monthly budget. When you get paid, allocate a certain amount to a separate account specifically for the down payment on a home. Ideally, you want to keep this money in a high-interest savings account (HISA) to earn money for you while you save. Sure, rates aren’t very high, but every little bit helps, and you may as well make your money work for you rather than just sit there.
I also suggest automating your savings. This way, you don’t have to think about it, and the money will consistently be deposited into your account. You can easily set up automatic deposits with your online banking, very similarly to how you would set up automatic monthly payments for your bills.
Reduce debt
Another thing you should work on while saving for a down payment is reducing your debt as much as possible. Now, this might sound counter-active since paying off debt means spending money you could be saving, but it will be beneficial in the long run. Not only do you get rid of paying the extra interest when you pay off your debt, but it also puts you in a stronger position financially. Your debt plays a large role in being approved for a mortgage, both in terms of how much you can be approved for and the mortgage rates you will be offered. Reducing debt will lower your debt ratios and increase your credit score, putting you in a better position for buying your first home.
Cut your expenses
Finally, make some lifestyle changes. Take a look at your budget and cut out any unnecessary expenses or things you can do without. This doesn’t mean you need to take all the fun out of your life, but be more selective. Do you really need to buy lunch out daily, or can you pack your own a few days a week? Do you need Netflix, Disney+, Crave, and Hulu? Or can you make do with one or two streaming services instead? Lifestyle changes like this may not seem like much at once, but they do add up over time, allowing you to save more in the long run.
