The Down Payment Playbook For Canada’s Housing Market

For most people, especially first-time home buyers, terms like down payment, mortgage, loan insurance, and other housing market jargon can be a bit overwhelming. But understanding them is vital if you want to start a fresh chapter of your life in your new home while getting the best value for your money.

The good news is that within a few minutes, you’ll easily learn “what is down payment”, how much house down payment you need, and what the best options are at your disposal.

Key Points

• The home down payment in the Canadian housing market is somewhere between 5% to 20%, depending on the location, value, and property type (pre-construction condo, townhouse, etc.)
• From investments and RRSPs to borrowed funds and government savings, there are plenty of ways to secure a down payment.

What Is the Down Payment?

A down payment is the money a person puts down before they buy something expensive, like a house or a car. It’s a portion of the total price, and the rest is generally paid for with a loan. Putting a down payment for a house can cut down on how much the borrower owes the lender, how much interest they pay throughout the term, and how much they pay each month.

How Down Payments Work

A down payment is an upfront payment made when purchasing a home, typically calculated as a percentage of the home’s purchase price. The higher the down payment on a home, the less you need to borrow, which reduces your monthly mortgage payments and the total interest paid over the life of the loan. 

For example, a down payment for a first-time homebuyer in the Canada housing market might be 5% of the purchase price, meaning that the rest will be covered by a loan or some other financing package. Using a down payment calculator or estimator can help you determine how much house down payment you need and how it impacts your mortgage. This is crucial for planning and budgeting effectively.

Different Types of Down Payment in Canada

This table provides a clear and concise summary of the different types of down payments available to Canadian homebuyers, along with key considerations for each type.

Minimum Down Payment Requirements in Canada

Before deciding on how much house down payment you need, it’s better to understand the minimum requirements in Canada. As of 2024, the latest federal regulations regarding minimum down payments are as follows:

• For homes priced at $500,000 or less, the minimum down payment is 5%.
• 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 $1,000,000 or more, the minimum down payment is 20%.

There’s no reason to put off your dream of owning a home by trying to save up 20% for a down payment today. Your savings may not keep up with the housing market or inflation, and laws like the mortgage stress test can make it more challenging to get a mortgage.

Use a down payment estimator to figure out the exact amount needed for different home prices and property types (e.g., pre-construction condo, townhouse, etc.) and find out how different home down payment amounts impact your monthly mortgage payments and total interest costs. Calculating a down payment amount allows buyers to make smart plans, save money, and plan their down payments.

Down Payment for First-Time Home Buyers

To revitalize the housing market supply and demand, the Canadian government does offer some support programs that can help them put more down as a down payment or manage their payments better and easier.

GST/HST New Housing Rebate

The GST/HST New Housing Rebate enables homebuyers to recuperate some of the GST or HST paid on the buying price or cost of building a new house. The rebate applies to new or substantially renovated properties, such as those bought from a builder or self-built residences. The total value of the rebate depends on the buying price and the region of the property (e.g., the Toronto housing market versus the Calgary housing market). 

• Eligibility: The home must be your primary residence. The rebate is available to homeowners who buy, build, or substantially renovate a home.
• Repayment: The rebate is a one-time financial benefit that allows eligible homebuyers to recover a portion of the GST or HST paid when purchasing or building a new home. Once you receive the rebate, there are no further financial obligations, such as repayments.

Home Buyers’ Plan (HBP)

With this plan, first-time home buyers in Canada can take up to $35,000 out of their Registered Retirement Savings Plan (RRSP) to buy or build a home that matches the program’s specific criteria. 

• Repayment: People who take money out of an RRSP must pay it back over 15 years to avoid paying taxes on it. 
• Eligibility: Must be a first-time home buyer or have not owned a home in the last four years.

First-Time Home Buyer Tax Credit

First-time home buyers in Canada can get a $5,000 tax credit when buying their first home. This can save them up to $750 in federal taxes. Eligibility: The home must be purchased, and you must not have lived in another home owned by you or your spouse or common-law partner in the previous four years.

Mortgage Loan Insurance

In Canada, if your down payment is less than 20% of the property’s purchase price, you are required to purchase mortgage loan insurance. This insurance protects the lender in case you default on your mortgage and is provided by entities such as the Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth Canada), and Canada Guaranty. In general, mortgage loan insurance has three main benefits:

• Access to Homeownership: Allows buyers with smaller down payments to enter the housing market.
• Lower Interest Rates: Typically, insured mortgages can secure lower interest rates as the risk to lenders is mitigated.
• Flexible Terms: Offers more flexible terms, potentially including longer amortization periods, which can lower monthly payments.

Mortgage Loan Insurance Premiums

The down payment amount generally determines how much of the loan goes toward mortgage loan insurance premiums. But, the correlation may not be as straightforward in some cases. 

Instead, it’s better to use the Loan-to-Value (LTV) ratio to calculate your insurance premiums. As the name suggests, LTV simply shows how much of the property’s total value is covered by the mortgage loan. 

Here are the premium rates as of 2024:

These premiums can be paid upfront or added to your mortgage and included in your monthly payments. Also, the exact financing structure depends on the mortgage lender, your financial standing as the borrower (e.g. having good credit, being a first-time home buyer, etc.), and some other factors. Using a monthly payment calculator can help you get a clearer picture.

Impact of Down Payment Size

So, what is the exact impact of a home down payment on your ability to buy a home in the Canada housing market? Why should you put more or less down? Well, it goes back to three things:

Interest Rates and Loan Terms

Your down payment amount can have a big impact on the interest rates and terms that lenders offer. More often than not, a bigger down payment on a home means: 

• Lower Interest Rates: Lenders may offer lower interest rates as there’s lower risk involved in handing you the funds..
• Better Mortgage Terms: Improved loan conditions, such as flexible payment schedules and lower fees.

Avoiding CMHC Insurance

If you put down at least 20% of the buying price, you won’t have to pay mortgage loan insurance. This can save you thousands of dollars over the mortgage term. 

For example, if you put a 5% down payment for a $500,000 home, the mortgage loan insurance premium would be approximately $19,000. A 20% home down payment wipes out this premium entirely.

Lower Monthly Payments and Total Interest Paid

A larger down payment reduces the loan principal, leading to lower monthly payments and less interest paid over the life of the mortgage.

• Monthly Payments: For example, on a $400,000 mortgage with a 25-year amortization at a 3% interest rate:
  • 5% Down Payment: Monthly payment would be approximately $1,893.
  • 20% Down Payment: Monthly payment would be approximately $1,516.
• Total Interest Paid: Over 25 years, a smaller loan amount due to a larger down payment results in significantly less total interest paid.

Paying Off a Loan

Homeowners who can’t make a large down payment can still reduce their mortgage debt over time through various strategies. You can also utilize a down payment calculator to estimate how different down payment amounts affect monthly payments and total interest costs. This tool helps in planning and saving effectively, giving a clear picture of the financial benefits of larger down payments.

Here are some ways you can do it:

Accelerated Payments

People can pay off their debts faster with accelerated payment plans, shortening the loan term and lowering the total interest amount paid over time. You can either increase the frequency of payments or pay lump-sum values during the year.

• Additional Payments: Homeowners can make extra payments towards their mortgage principal. Switching to bi-weekly or weekly payments results in more payments each year, reducing the loan term and interest costs. For example, bi-weekly payments mean 26 payments a year, which helps pay off the mortgage faster.
• Lump-Sum Payments: Many mortgages allow lump-sum payments annually without penalties. Utilizing work bonuses or tax refunds for these payments directly reduces the principal.

Prepayment Privileges

Residents can make bigger payments or pay off their mortgages faster without paying a penalty if they have prepayment privileges. There are two ways to do it:

• Double-Up Payments: Some lenders permit doubling regular payments without penalties. This accelerates mortgage repayment and reduces interest costs.
• Annual Prepayments: Typically, lenders allow up to 20% of the original mortgage amount to be prepaid annually without penalties, offering significant savings over time.

Refinancing

It is possible to get better terms on your mortgage by refinancing, such as lower interest rates, a shorter term, or consolidating your debts. 

• Lower Interest Rates: Refinancing to a lower rate can reduce monthly payments and the total interest paid.
• Shortening the Term: Refinancing to a shorter-term mortgage (e.g., 15 years instead of 25) increases monthly payments but drastically reduces the overall interest.
• Debt Consolidation: Refinancing can also help consolidate higher-interest debts into the mortgage, simplifying payments and reducing interest costs.

Bottom Line

There you have it. Now, you know what down payment means and how much house down payment you need in the Canada housing market. Make sure to study the latest programs and options that apply to your budget, location, and property type. If any questions are left unanswered, feel free to contact our experts at Platinum Condo Deals and we’ll help you with everything related and not related to down payment.