Minimum Mortgage Downpayment Amount in Canada

How much should you have for your downpayment?

The minimum down payment required depends on the property value. In Canada for properties below $500k, a minimum 5% downpayment is needed. For properties between $500k to below $1M, between 5% and 7.5% should be put down. For properties with a value of $1M or above, 20% downpayment is needed. Besides the down payment, you need to cover the closing costs too. 

The amount of your down payment affects what opportunities you’ll have for your mortgage. With the minimum down payment of 5% for properties under $500k, you will have a larger mortgage and have to pay a large CMHC insurance premium.  Another disadvantage shows up in the mortgage stress test in which you should show that you can still pay the mortgage payments if the interest rate rises. It is clear that on a larger mortgage, your monthly mortgage payment could be significantly higher. 

On the other hand, a down payment of 20% or greater shows the lenders that you’re willing to put more of your money into the property. Such a down payment opens up more opportunities and fewer costs since you can avoid paying the large CMHC insurance.

How much is the minimum down payment?

Having only the minimum down payment may enable you to buy your home sooner. The minimum down payment that lenders in Canada require is [1]:

Purchase priceDown payment percentage of the purchase price
Under $500,0005% 
$500,000  to $999,9995% of the first $500,000 then 10% of remainder
$1 million and up20%

However, the optimum down payment amount from the perspective of not paying CMHC insurance and at the same time getting the best mortgage rate is 35%. Putting 20% down is the recommended standard since in this way you can avoid CMHC insurance.

How much mortgage can I afford?

The general rule of thumb for mortgage eligibility is that you can borrow around four times your annual household gross income, and no more than 32% of your gross income should go for housing and mortgage expenses [2]. However, there are more factors involved in calculating your affordability amount and consequently the real calculation is more complicated. For example, your monthly non-housing expenses such as food and utilities and also your monthly debt payments are involved as they reduce the amount of income you have for your mortgage payments. 

For example, say you have an annual household income of $140,000 and have saved $70,000 for a down payment. Your monthly non-housing expenses are $2,000; and you’re paying off your student debt at around $300 monthly and your car loan costs you $400 per month. That’s $2,700 from your monthly income to start with. Your mortgage affordability, the amount you can afford to spend on a home, works out at $658,000. You can find out how much you can afford by using a Canada mortgage affordability calculator

After the mortgage stress test was introduced in October 2016, and later revised and expanded in January 2018, buyers’ affordability decreased significantly. The aim of the mortgage stress test is to ensure that homeowners in Canada can still meet their mortgage payments if the interest rate rises considering the current historically low interest rate. This helps to protect the Canadian economy, specifically the real estate sector, against any future financial stress. You need to show that the monthly mortgage payments still fit into your monthly income by using the greater interest rate of your mortgage rate plus 2% or the Bank of Canada 5-year benchmark rate & qualifying mortgage rate of 5.19% as of January 2020 [3]. 

To use your current annual income as the base, you must have passed the probation period which means you have been in the job for at least three or six months. 

How can I minimize the Housing Corporation (CMHC) insurance?

By putting a minimum downpayment of 20% you can avoid paying CMHC insurance. If you put a down payment of less than 20% on your new home, your mortgage is considered a high ratio loan (ratio of loan to home value) and consequently you must take out CMHC insurance to cover the lender if you default on the mortgage. CMHC insurance premiums can run into the thousands of dollars [4]. 

For example, on a $500,000 home, here are the insurance premiums for various down payment percentages.

Down paymentCMHC insurance premium
5%    ($25,000)$19,000
10%  (50,000)$13,950
15%  (75,000)$11,900
20%  (100,000)$0

Using a down payment of 20% or more exempts you from paying the CMHC insurance. For these cases, still lenders are usually responsible for the CMHC premium, but they generally pass it on to you by putting it on the mortgage and that increases your monthly payment slightly. That is a reason the mortgage rate that you can get for a 35% down payment is lower than 20% down payment since lenders need to pay less CMHC mortgage default insurance. 

How can I get the best mortgage rate? 

Shopping around financial institutions for the lowest rate is just one part of finding the best mortgage rate [5]. The lowest rate may come with mortgage unfavourable terms (e.g. penalty for early repayment) that don’t work for you. You’ll have to visit the lenders to discuss what the lowest rate is as they’re not generally shown on the institution’s website. Always compare the best mortgage rates in Canada before settling on a mortgage.

You can put some things in place so the financial institution is willing to talk to you about their best mortgage interest rate. Having a healthy credit score is necessary to start the conversation. You can improve your credit score by paying bills on time, keeping a low credit card balance and using different types of credit (e.g. credit cards, loans, line of credit) [6].

The amount you have for your down payment is also key. Although a down payment of 20% avoids the CMHC insurance, putting 35% or more down will get the lender’s favourable attention since they pay less mortgage default insurance. Newcomers to Canada may be able to qualify for a mortgage without having a long credit history here if they have a 35% (or more) down payment [7]. Without two years’ employment history, newcomers must show that they’ve been in the country for five or fewer years, have permanent residence status and have worked full-time for at least three months. If you’re applying for any home buyer programs, such as the First Time Home Buyer’s Incentive, check what down payment they require.

How much are closing costs? 

Once you’ve signed the contract for buying your new home, you’ll need to pay the closing costs to finish the deal. Some of the closing costs can be significant, such as the Land Transfer tax. On a $500,000 home in Toronto, the land transfer tax is $12,950 if you don’t get any rebate. However, the location of your property affects the land transfer tax. In Alberta for the same price home with a 20% down payment, the land tax is $280 [8]. Other closing costs include legal fees (around $900), property appraisal fee ($300-$500), and the home inspection fee (around $500). Use our closing cost calculator to understand more of the closing costs in Canada.

The bottom line

The simplest answer to “how much money do you need to buy a house in Canada” is “as much as possible”, but the lowest is 5% down payment for any property less than $500k. You need to balance how much money you can use for the home purchase with your desire to own a home. Waiting a little longer and saving up more may save you money in the end. You can periodically check how you’re doing through our mortgage affordability calculator.


References

  1. How Much You Need For A Down Payment.  Government of Canada.
  2. Final Revised Guideline B-20: Residential Mortgage Underwriting Practices and Procedures. Government of Canada: Office of the Superintendent of Financial Institutions.
  3. What Everyone in Canada Should Know about the CMHC. WOWA.ca
  4. Seven Biggest Mistakes that Buyers Often Make. WOWA.ca
  5. Improving your Credit Score. Government of Canada.
  6. Alberta Land Transfer Tax. WOWA.ca

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