Home buyers: How large should your down payment be?
When you buy a house or a condo, there are minimum down payment requirements to consider as you make your financial arrangements. If the purchase price is $500,000 or less, you need a 5% down payment. For properties between $500,000 and $999,999, there is a 5% minimum on the first $500,000 and 10% on the remainder. For properties worth $1 million or more, you need a 20% down payment.
If you are buying a property with the intention to rent it out to tenants, you need a 20% down payment regardless of purchase price.
Borrowers who are self-employed or who have poor credit may require a down payment that’s larger than the minimum.
For those purchasing with a down payment of less than 20%, Canada Mortgage and Housing Corporation (CMHC) mortgage default insurance is required, in order to protect the lender from the higher potential for default in a high-ratio mortgage. The premium (the amount you pay) for this insurance ranges from 2.8% to 4% of the total mortgage. Premiums in Saskatchewan, Ontario and Quebec are subject to provincial sales tax as well. The premium is rolled into your mortgage amount.
If you can put together a 20% down payment, you’ll save that CMHC insurance premium, as well as the interest you’ll pay on that premium over the life of your mortgage. However, for some aspiring home buyers, saving 20% could take many years to achieve—and it’s not required, unless they are required to in order to buy a home valued at $1 million-plus, or to buy a rental property. Purchasing with less than 20% down could make financial sense, especially for buyers who expect to live in their home for five or more years, who are borrowing less than what they are approved to borrow, or who live in neighbourhoods with high rents.
If someone needs to put all their savings into a down payment to qualify for a mortgage on a home, this is a potential yellow flag. Buying under these conditions could leave them with no emergency fund for unexpected home repairs or just life’s everyday surprises. Putting all of their savings into a down payment also increases the likelihood they will not be able to save each month after making their mortgage payments, paying other home ownership costs and covering other their basic living expenses.
However, if you have enough savings to buy a home with a down payment larger than 20%, you might qualify for a home equity line of credit that can act as an emergency fund.
If a home buyer is questioning whether it’s best to leave some of their savings invested instead of putting down a larger down payment, especially if they have more than 20% down, the answer is—it depends.
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