As you prepare to purchase a home, one integral aspect of your home buying journey will be your down payment. In this article, we’ll look at what a down payment is, how much you’ll need, and tips on how to save.
What is a down payment?
When you’re purchasing a home, a down payment is the initial amount of money that will be put towards the purchase of the property. This amount is usually paid in cash which can come from various sources, such as savings, investments, or a gift from a family member. A mortgage lender will deduct the down payment amount from the purchase price of the home, and the mortgage amount will cover the remaining cost of the home.
How much do I need for my down payment?
How much you need for a down payment depends on the purchase price of the home you’re looking to buy. In Canada, there are guidelines that determine the minimum down payment needed.
Purchase price |
Minimum down payment amount |
| $500,000 or less | 5% of the purchase price |
| $500,000 to $999,999 | 5% of the first $500,000 of the purchase price 10% for the portion of the purchase price above $500,000 |
| $1 million or more | 20% of the purchase price |
Let’s say you’re looking to purchase a townhouse for $650,000, here’s how you’d calculate the minimum down payment amount needed.
5% of the first $500,000 = $25,000
10% of the remaining $150,000 = $15,000
Total minimum down payment = $45,000
Aiming Above the Minimum
While the minimum down payment amount is all you’ll need to secure your home, if you’re able to, it’s good practice to put down more than the minimum. When you apply for a mortgage with a down payment of less than 20%, it’s considered a high-ratio mortgage. This means the mortgage loan amount is greater than 80% of the value of the property you are purchasing, also referred to as the loan-to-value (LTV) ratio. If you have a high-ratio mortgage, you’ll need mortgage loan insurance. This is a federal requirement and ensures that higher-risk mortgages are properly insured, protecting all parties involved. This mortgage insurance is provided by Canada Mortgage and Housing Corporation (CMHC).
How much you pay in mortgage insurance is based on the percentage of your loan and the amount of your down payment and can range from 0.60%-4.00% of the total loan value. These insurance premiums can be paid upfront in a lump sum when you purchase your home or, you can have the payments added to your regular mortgage loan payments. This mortgage calculator provided by CMHC gives a good overview of how you can expect to pay in interest and mortgage insurance premiums based on the home price and down payment amount.
Now that you have a better sense of what a down payment is and how to determine how much you’ll need, you can work towards saving enough to purchase your future home. Here are some tips to help you save.
1. Budget accordingly
When you have a big savings goal like a down payment you’re working towards, budgeting is especially useful. The key to creating a budget that you can stick to is to keep it simple. Start by looking at how much you earn and then, subtract your regular expenses, like rent, bills, insurance, etc. This will give you an idea of how much you have leftover each month for saving and expenses.
Another useful step to budget effectively is to track your spending. While it may seem tedious to track your spending, it can often help you see where your money is going and how you can redirect funds to reach your down payment goal. Even if you track your spending for just one week, it will give you a good indication of areas where you may be overspending.
2. Automate your savings
One of the best ways to save consistently is to automate your savings. Every payday make it a goal to pay yourself first. For example, if you get paid biweekly into your chequing account, set up a recurring transfer from your chequing to your savings to make saving even easier. If possible, transfer your funds to a high-interest savings account at another financial institution so you’re less inclined to use the funds for anything aside from your savings goal.
3. Utilize registered accounts
Registered accounts are a great way to boost your savings potential when you’re working towards your down payment. Two registered account types that are beneficial for prospective homeowners are a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA).
Benefits of saving in an RRSP
- Contributions are tax-deductible
- Savings grow tax-free
- Withdraw up to $35,000 from your RRSP for the purchase of a qualifying home under the Home Buyer’s Plan
- You have up to 15 years to repay the funds withdrawn under the Home Buyers Plan
Benefits of saving in a TFSA
- Various options to save tax-free like high-interest savings accounts, GICs or investments
- Interest earned is tax-free
- The contribution limit increases each year so you can save more
- Funds can be withdrawn at any time without penalty or fees
Hopefully this information will help you as you save a down payment for your future home. When you’re ready to take the next step, get in touch with a mortgage broker using our find a mortgage broker tool. In the meantime, learn more about the mortgage application process and the different types or mortgages in our previous articles.
If you have an MCAP mortgage and have any questions, contact us!
