A a larger down payment means you’re borrowing less money.

How much you'll need for a down payment in Canada

How much you offer really can impact your mortgage.

Sep 20, 2022

First-time Home Buyer

Down Payment

Ready to purchase your dream home? You’ll be pleasantly surprised to know that you won’t need to offer the entire cost up-front.

Instead, thanks to the option of mortgage financing, you can offer up a down payment and get started on building your equity. But, how much down payment will you need? And how will the amount affect your mortgage rates?

What is a down payment?

For most Canadians, in order to secure a mortgage loan, most financial providers–whether a bank or private lender–will need to confirm that you have a down payment. Defined as a lump-sum of money paid up-front, the down payment is a percentage of the overall price of the home, with the rest of the cost being covered by a mortgage.

Is your down payment the same thing as your deposit?

When your offer to purchase a home is accepted by the sellers, you’ll need to put down a deposit to indicate that you are serious about following through.

Generally, this deposit is a sum of money that is paid upfront and on average is about 5% of the offer price, in the form of a certified cheque or bank draft.

Consider the deposit a down payment on the down payment. Once the sale officially goes through, the amount of your deposit is deducted from the down payment.

Calculating the minimum down payment you’ll need

Given that a down payment is calculated as a percentage of the total costs of the home, the rule of thumb is:

If the home costs $500,000 or less, you’ll need a minimum of 5% of a down payment
If the home costs more than $500,000 up to $99,999, your down payment will be 5% on the first $500,000 and then 10% of the remainder above $500,000
If the home costs $1 million or over, you’ll need a minimum 20% down payment

While there’s a silver lining knowing that, depending on your price point, you won’t have to fork over an automatic 20% down payment, it’s important to note that if you do give less than 20% you will need to get mortgage insurance to qualify.

Does your down payment impact your mortgage?

You might not have known this, but mortgage rates can change depending how much down payment you have available.

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When you have less than a 20% down payment

According to the Canada Mortgage and Housing Corporation, a mortgage with less than 20% is considered “high ratio.” If the house you’re purchasing is less than $1 million, you’ll need to also get mortgage insurance with this down. In this situation, mortgage insurance doesn’t protect you, but instead protects the lender in case you’re unable to make your payments.

While this will add premium payments to your monthly mortgage costs, lenders are more willing to offer some of the best–and in most cases lower–interest rates.

When you have a 20% down payment

While you might avoid paying mortgage insurance when you offer a minimum 20% down payment, because the lender isn’t protected by the CMHC if you stop making your payments, there is a bit more risk for said lender. That’s why, in this situation, rates are just slightly higher with this down payment.

When you have 35% or more of a down payment

The higher your down payment is, the lower your lender risk goes, putting you closer towards the mortgage rates seen for “high ratio” purchases. For some lenders, 25% down payment gets you very close to their lowest rates, while others require 35%.

How do you decide if you should put down a larger or smaller down payment?

Why you should opt for a larger down payment

Overall, a larger down payment means you’re borrowing less money, which means you’ll pay less in total interest costs over your mortgage’s lifetime. Not only does saving for a larger down payment help you save overtime, it also offers you:

Smaller monthly payments: Borrowing less money, means you’re paying back a lower amount. Low monthly payments can definitely make your life easier, especially if your wallet needs a little wiggle room for unforeseen circumstances like a job loss, or large surprise expense.
Lower rates: As mentioned, the higher your down payment, the lower your interest rates could be.
No mortgage insurance: You’ll also save by avoiding having to add mortgage insurance into your monthly payments, as premiums.
Future borrowing power: Thinking you might need more loans or credit in the future? Having a lower mortgage means you’ll also have a lower monthly debt-to-income (DTI) ratio–which compares how much debt you have, compared to how much money you make. Having a lower DTI ratio–usually below 36%–looks good in the eyes of lenders and/or banks.
Potential equity: The larger your down payment, the more equity you’re putting in your home. If you put down 25% down payment, you now own 25% of your home right off the bat, versus only 5% or 10%. With more equity in your home, the more you’ll be able to potentially borrow against with a home equity line of credit, in the future.

Why you should opt for a smaller down payment

Obviously the best pro about a smaller down payment is that you don’t have to save up as much, making it possible for you to:

Buy sooner: For a lot of people, saving up for a 20% down payment can take a long time–which could look like years, or even decades. Having a smaller down payment means you might be able to get your dream home–or at least your first home–sooner than later.
Have emergency funds or cash for other priorities: Let’s say you do have enough for 20%–giving up all of your savings can sometimes feel overwhelmingly scary. What if there’s an emergency? What if something happens–like a health scare or your car breaking down–where you need money ASAP? Giving a smaller down payment means you can still split your savings by investing part into a home, and the other part can stay in your account as emergency funds. And in other instances, sometimes you just want to keep your cash in your retirement savings or towards something else, like a business or stocks
Have money to pay for renovations: Keeping some of the cash on hand means you can put it towards potentially giving your space a facelift to turn your house into a home.

At the end of the day, the down payment you offer has to make sense for you and the home you’re looking to buy. But if you need more help figuring out what’s best, our Pine mortgage experts are always here to help.

Apply through our easy-to-use application and we’ll put you in touch with one of our agents to help you with your down payment questions and home-buying journey.