Down payment for the purchase of your first house: what you need to know

The down payment is the most important amount of money you need to raise for the purchase of your house. This amount is a deciding factor when it comes to determining your mortgage options and the maximum price you can pay for a house.

Where to start? How much do you need to accumulate? What is the minimum percentage? Is mortgage insurance mandatory?

This article will tell you what you need to know about the down payment for the purchase of your first house.

SUMMARY

What is a down payment?
How to calculate the down payment
The impact of the down payment on the total cost of your mortgage
How to raise money for your down payment

To begin with, you must understand what a down payment is, and determine your borrowing capacity. Meet with a mortgage broker to explore your options. You should also request a mortgage preapproval to have a good idea of the maximal amount your can pay for a house, which will also determine the amount required for the down payment.

What is a down payment?

The down payment is the initial amount your need to pay when buying a house or condo. This amount is deducted from the purchase price and the remaining balance is covered by your mortgage.


EXAMPLE

If you give a $20,000 (5%) down payment for a $400,000 house, you will have to take a mortgage of $380 000.

 

How to calculate the down payment?

Most of the time, the amount of the down payment will be between 5% and 20% of the property price. However, the percentage depends on certain factors such as the type of property and its price. The higher the purchase price, the higher the minimum percentage of down will be.

In addition, down payment requirements when buying a house might be higher if, for example, you are self employed or if you have a bad credit history.

Percentage of minimum down payment

$500,000 or less 5% of purchase price
$500,000 to $999,999
  • 5% of the first $500,000
  • 10% of the amount in excess of $500,000
$1,000,000 or more 20% of purchase price

 


EXAMPLE

For a $600,000 house, the minimum down payment is $35,000:

  • 5% of the first $500,000: $25,000
  • Plus 10 % of the remaining $100,000: $10,000

 

Mortgage loan insurance

The purpose of the mortgage loan insurance (or mortgage insurance) is to protect the lender in case you are unable to meet your mortgage payments. Mortgage insurance is generally provided by the Canada Mortgage and Housing Corporation (CMHC). The premium amount is added to the mortgage loan.

Is mortgage insurance mandatory?

Mortgage insurance is mandatory when the down payment is less than 20% of the purchase price of the property.
In some cases, even with down payment of 20% or more, mortgage insurance may be required, particularly if you are self-employed or if you have a poor credit history.

The impact of the down payment on the total cost of your mortgage

The amount of your down payment has a significant impact on the total cost of your mortgage. Same as with any other loan, the more you borrow, the more interest you will pay. Accumulating a higher down payment allows you to apply for a smaller mortgage and save thousands of dollars in the long run.


EXAMPLE

For a $400,000 house:

  • Interest rate of 4%
  • On 25 years
  • Monthly payments
  • Mortgage insurance premium added to the mortgage loan

Down Payment

$20,000 (5%)
$40,000 (10%)
$80,000 (20%)

Mortgage

$380,000
$360,000
$320,000

Mortgage Insurance Premium

$15,200
$11,160
Not required

Mortgage (including the insurance premium)

$395,200
$371,160
$320,000

Total cost of your house

$643,649
$625,712
$584,979

Source of the example: Government of Canada

 

Buying a house now or accumulating a higher down payment?

You have several options when it comes to buying a house. There are benefits to both situations whether you buy now with a smaller down payment or wait to accumulate a larger down payment.

Choosing whether to make a smaller or larger down payment on a house is an important decision that will have a significant impact on your finances, short-term, and long-term.

Below is an overview of the benefits and drawbacks for both approaches.

  Smaller down payment (less than 20%) Higher down payment (at least 20%)
Benefits
  • Offers the possibility of buying more quickly
  • Allows to keep more cash for other expenses or to invest elsewhere
  • Lower monthly payments
  • Avoids payment for mortgage insurance

Drawbacks
  • Requires to add the cost of the mortgage insurance premium
  • Higher monthly payments
  • Requires more time to raise money before buying
  • Results in a decrease of liquidity, therefore less flexibility in the event of unforeseen circumstances

 

No matter which strategy you choose, your budget must be at the core of your decisions.

  • Be sure to take into account other expenses related to buying and maintaining a property.
  • Keep up to date on market developments, including current mortgage rates and trends. 
  • Keep a sufficient amount of money for unforeseen problems.

How to raise money for your down payment

Spend wisely and save

Several actions and good practices can help you save for the purchase of your first house.

Some examples:

  • Set a budget and a match plan
  • Opt for automatic savings
  • Review your spending habits
  • Set aside all surplus

Take advantage of government programs

You can take advantage of the following government programs to help you save for the purchase of your first home.

  • RRSP : The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP for the purchase of your first house.
  • FHSA : The First Home Savings Account allows you to raise money for your down payment and is tax-free. 
  • TFSA : The Tax-Free Savings Account can also be useful to raise money for your life projects such as buying a house, and is also tax-free.

Ask you financial institution for more details about these options.

 

Contact a real estate broker to guide you through each step of the process. Your broker has access to a network of experts, such as mortgage brokers, to support you every step of the way.

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