If you are saving to buy your first home, you may wonder how much to save for a down payment. The amount you need to save depends on many factors, including the current mortgage guidelines, the purchase price, and your mortgage lender’s requirements.
So, how much is a down payment on a house in Canada? You may have heard you must put 20% down when buying a home. However, that is not necessarily the case. The minimum down payment largely depends on the purchase price of the home. Here’s how you can calculate how much to save for a house.
What Is a Down Payment?
A down payment is the money you pay upfront when you buy a house with a mortgage. Your mortgage lender deducts the down payment from the home’s purchase price.
Typically, you pay your down payment in cash at closing, in addition to other closing costs like land transfer tax, legal fees, and property taxes.
What Is the Minimum Down Payment for a House?
In Canada, the minimum down payment percentage you’ll need depends on the property’s purchase price and the type of home you’re buying.
If you are buying a primary residence, the minimum down payment changes depending on the purchase price:
The size of your down payment directly influences your total mortgage cost. When you put less than 20% down on a home, you will be required to pay mortgage default insurance, also known as CMHC insurance or mortgage loan insurance. This insurance is typically added to your monthly mortgage payments and protects your lender if you default on your payments.
While putting 20% down may be a smart financial decision, saving for a sizeable down payment is difficult for many Canadians. As such, many choose to put 5% down instead; however, this results in paying thousands more over the life of the mortgage.
What is Mortgage Loan Insurance?
Mortgage loan insurance, which can be purchased from Canada Mortgage and Housing Corporation (CMHC), Sagen (previously known as Genworth), or Canada Guaranty, protects the mortgage lender in case of default or missed mortgage payments.
The premiums for this insurance work on a sliding scale, decreasing as you put more of your money in as a down payment percentage. The premiums range from 0.6% to 4.5% of your total mortgage. The homebuyer can add them to their mortgage or pay them in one lump sum.
In addition, home buyers in Ontario, Quebec, and Manitoba will also have to apply provincial sales taxes to the premium.
On the other hand, there are several benefits to mortgage loan insurance, including:
- Own a Home Sooner – By saving 5%, you may be able to own a home years sooner.
- Lower Interest Rates – Mortgage lenders offer their best interest rates to those with insured mortgages.
- Stabilizing the Housing Market – Insured mortgages help support the housing market by protecting lenders against defaults and foreclosures.
Even when factoring in mortgage default insurance, you may be able to save money by putting 19% down instead of 20%. For example, let’s assume a Toronto home buyer puts 19% down on a $650,000 home.
The lender offers a five-year fixed mortgage at a rate of 3.29%, and a mortgage insurance fee of $14,742 is added to the mortgage. Over five years, assuming no additional monthly payments, this buyer would pay almost $66,500 in interest.
What if that same buyer decided to put 20% down? They wouldn’t have any mortgage insurance fees, but their lender’s best rate is 3.74%. Over the course of the same five years, this home buyer would spend just under $72,300 in interest.
What’s the Average Down Payment on a House in Canada?
According to the Canadian Real Estate Association (CREA), the average home price in Canada as of September 2024 is $669,630. But, this average price is typically significantly higher in major urban centers such as Vancouver and Toronto.
Here are the benchmark home prices as of September 2024 across Canada, according to the CREA, and the down payment needed:
When getting pre-approved for a mortgage, your lender may require a larger down payment in order to qualify for a mortgage, depending on your situation.
How to Save for a Down Payment
Now that you know how much you need for your down payment, here are the best ways to save.
Budgeting
Creating a budget is one of the best ways to figure out where your money is going and how much you can save. Automate your savings by setting up pre-authorized transfers to a savings account monthly or biweekly.
Reducing Debt
Not only is it more challenging to save for your down payment with monthly payments, but your debt service ratios directly impact how much mortgage you qualify for. Your Total Debt Service Ratio (TDS) takes your monthly housing costs and minimum debt payments as a percentage of your gross income. Generally, your TDS cannot exceed 44% of your gross monthly income. By paying off debt, you can reduce your TDS and, therefore, increase your buying power.
Open a Savings Account
There are several places you can put your down payment savings.
- First-Home Savings Account (FHSA) – The FHSA allows you to save up to $40,000 tax-free towards the cost of your first home. In addition, contributions are tax-deductible.
- Tax-Free Savings Account (TFSA) – A TFSA is another type of savings account not specific to buying a home. Money in a TFSA grows tax-free and can be withdrawn at any time for any reason. However, it is not tax-deductible.
- Registered Retirement Savings Plan (RRSP) – While an RRSP is primarily designed for retirement savings, you can withdraw up to $60,000 from your RRSP through the Home Buyers’ Plan (HBP). However, if you utilize the HBP, you are required to repay the withdrawn amount within 15 years.
