Buying a house in Canada, even in the best-case scenario, can feel like a financial feat in itself. With average home prices nation-wide being what they are, even the minimum down payment of 5% (on the first $500,000 of the home value) can be challenging—let alone the much coveted 20%.
While there are many financial benefits to that 20% number (avoiding a CMHC premium, being one), there are also factors that may make it better to make a down payment of less than 20%. The answer will depend on your financial situation now and in the future.
Here is everything you need to know about making a down payment on a house in Canada. Mortgage professionals who frequently visit our website, this would be a good article to pass on to home buyers who are early in the process of putting together a down payment on their first house in Canada.
A down payment is the amount of money you pay upfront when you buy a home. The down payment is usually combined with the mortgage loan to pay for the total price of the property. Aside from your down payment amount, your credit history, credit score, total debt, and annual income determine the size of the home loan you may qualify for.
The down payment you make on a property plays a significant role in determining your mortgage rate. For example, if you make a down payment of under 20% of the purchase price of the property, you will have to pay a CMHC premium or a high-ratio default insured mortgage. If you can make a down payment of over 20%, lenders typically offer significantly better mortgage rates due to the lessened risk to them.
When using a mortgage to purchase a property in Canada, you will have to make a down payment. Essentially, the down payment is the money you pay up front on the price of your home, with your home loan covering the remainder.
Typically, the minimum down payment in Canada is 5% for homes that are up to $500,000. However, some lenders might ask for more money up front. When the purchase price of a home is more than $500,000, the minimum down payment is usually 5% for the first $500,000 and about 10% for the rest.
There are several factors that could impact the minimum amount you will likely have to make as a down payment on your home. In certain instances, you may be obligated to make a down payment of more than 5% on a home that costs $500,000.
For example, if you have poor credit history you may be forced to make a higher down payment, which would eliminate risk on behalf of the lender. You may also have to make a larger down payment if you are self-employed, which would make getting preapproved an important part of the home buying process.
There are different types of down payments you might have to consider, depending on the kind of real estate transaction you want to complete. The different types of minimum down payment include:
- Owner-occupied home
- Rental property
- Second home
Here is a closer look at each:
1. Owner-occupied home
For owner-occupied homes, you would pay a minimum down payment in Canada of 5% on the first 500,000 and 10% on the amount above $500,000. The total of those two numbers equals your minimum requirement on a down payment.
If you want to avoid the CMHC premium (also known as mortgage default insurance, or private mortgage insurance or PMI), you have to make a minimum down payment of 20%. If less than 20% is applied to the down payment, that CMHC premium can be as much as 4%.
2. Rental property
As mentioned, the minimum down payment varies depending on the type of real estate transaction you want to complete. For a rental property, for instance, most lenders will require a down payment of at least 20%.
3. Second home
The definition of a second home in Canada is one used for recreation, family or other purposes. Your second home can be purchased for as little as 5% down payment and, like the owner-occupied home, a 20% down payment will help you avoid the CMHC premium.
If you make a larger down payment than the bare minimum, you will likely end up paying less interest over the life of the loan. Besides that, you will not be on the hook for private mortgage insurance—i.e., insurance that protects the mortgage lender in the event you fail to make payments—if your down payment is 20% or more.
While it may not seem like it at first, saving on mortgage default insurance can add up to a significant additional cost. Because purchasing a home will likely be one of the biggest expenses in your life, it is important to save where possible.
Making a down payment of 20% eliminates private mortgage insurance, meaning the lender has less security of being protected if you default on your mortgage compared to if you made a down payment of less than 20%. Therefore, mortgage rates increase accordingly.
If, on the other hand, you make a down payment of 25%, you decrease the risk to your lender enough that they will offer rates comparable to the rates you will find attached to a high-ratio mortgage. In fact, in order to secure low rates in the high-ratio mortgage category, some lenders will require a down payment of 35% or more.
The down payment for a house in Canada will vary, depending on the lender. However, the minimum down payment will look like this (broken down by final sales price):
While it varies depending on your lender, the minimum down payment on a house in Canada is 5% on a property priced under $500,000. To calculate what the 5% down payment will look like, you can multiply the final sales price of the property by 0.05.
If the home you are buying is between $500,000 and $999,999, you will have to make a down payment of 5% for the first $500,000 of the buying price and 10% for the amount above the $500,000. To calculate the minimum down payment in this case, you can multiply the first $499,000 by 0.05 ($24,950) and the remaining amount by 0.1. The sum of the resulting two numbers is your minimum down payment.
Over $1 million
On properties that cost $1 million or more, your minimum down payment is 20%. To calculate a down payment of 20%, you have to multiply the final sales price by 0.2.
The average down payment on a house in Canada varies widely from province to province. Data from the Canadian Real Estate & Housing Market Forecast in 2021 can provide some insight into the average down payment across Canada:
Much is made about the coveted 20% down payment on a house in Canada. During your home buying process, you likely heard this from your parents or other home buyers you may know. However, due to rising interest rates and skyrocketing home prices, this may not be the best advice in 2023.
To be clear, the 20% down payment on a house is grounded on strong financial principles. Among the many economic benefits of putting 20% down is the elimination of CMHC insurance, as well as protection in the event of housing market corrections.
On the other hand, however, saving for a 20% down payment on a house is a significant feat financially, especially at a time when, according to the Canadian Real Estate Association, the average home price in Canada is roughly $630,000. Saving to make a 20% down payment on a house at that value ($126,000) would take most Canadians years; not to mention that a lot can happen to the Canadian real estate market in that amount of time.
The minimum down payment rules can be a little bit confusing, so let's do an example down payment on a $800,000 house in Canada. To get right to it, the minimum down payment would be $55,000, but let’s break down that figure.
- The minimum down payment in Canada is 5% on the first $500,000 of the home purchase price. This means that if you bought a house for exactly $500,000, your minimum down payment would be $25,000.
- If the house you’re buying is more than $500,000, such as for this $800,000 house, the minimum down payment for the costs beyond that $500, 000 figure must be charged at 10%.
- For this $800,000 home, the minimum down payment on the first $500,000 is $25,000. Then the remaining $300,000 down payment needs a 10% downpayment, which is $30,000.
- $25,000 for the first $500,000 + the $30,000 for the 10% downpayment = a $55,000 total minimum down payment on a $800,000 house.
There are plenty of options for making a down payment on a house in Canada. If you are able, making a down payment of 20% has its benefits—but it could also have its pitfalls. Before committing to a down payment, it is important to understand the possible long-term implications. Does it make sense for your financial goals? By considering both the short- and long-term, you will be able to enjoy your dream home—minus the stress.
As we have seen, there are many factors that can affect your down payment. It can be a very tricky road to navigate, and we advise you to speak to the best mortgage professional in your area for assistance. They can help you see the bigger picture.
Do you have experience with making a down payment on a house in Canada? Let us know in the comment section below.