Down Payment Requirements for Mortgages in Canada
When it comes to obtaining a mortgage in Canada, understanding the down payment requirements is essential. Your down payment plays a crucial role in determining the type of mortgage you can secure, and the interest rates for which you may qualify.
Down payment requirements can vary depending on the type of mortgage you apply for - insured mortgages, uninsured mortgages, rental properties, non-prime mortgages, refinancing, and private mortgages. Whichever mortgage is right for you, a down payment is necessary.
Minimum down payment requirements in Canada:
- Owner-occupied home worth up to $500,000: 5%
- Owner-occupied home worth $500,000 to $1.5 million: 5% of first $500,000 plus 10% of remainder
- Refinance mortgage: 20%
- Rental property: usually 20%+
- Uninsured mortgage: 20%+
- Private mortgage: 20%+
Being prepared to get a mortgage to purchase a new home requires you to save for a down payment. If you have not started saving for a down payment, there are interesting ways to do so that we will discuss below.
How Does a Down Payment Work?
Mortgage lenders want a borrower to have some equity in the property. This is an investment by the borrower in the property that provides a cushion of protection for the lender, sometimes referred to as “skin in the game.” When someone purchases a property financed by a mortgage, they must have at least 5% of the property value in the form of a down payment that is to be paid upfront. For instance, if you are purchasing a property for $400,000, you need at least $20,000 of your own funds for the down payment, with the lender providing up to 95% of the property value, or $380,000 in this example.
The minimum required down payment may be greater than the above example and depends on the type of property and the type of mortgage.
Let’s review the minimum down payment requirements for the main mortgage categories.
How Much Down Payment is Needed for an Insured Mortgage?
The minimum down payment for an insured mortgage is 5% of the first $500,000 of property value and 10% of the value between $500,000 and $1.5 million.
Examples of the minimum down payment requirements for insured mortgages:
The minimum down payment for a $400,000 home is:
- Property price = $400,000
- Minimum down payment = 5%
- Down payment required = $20,000
The minimum down payment for a $700,000 home is:
- Property price = $700,000
- Minimum down payment = 5% of the first $500,000 of property value and 10% of the value between $500,000 and $1.5 million
- Down payment required = $45,0000
Mortgage insurance is not available for mortgages on properties worth more than $1.5 million.
If the borrower has a down payment that is less than 20% of the home’s purchase price, the mortgage lender will require mortgage default insurance. Mortgage default insurance is available to borrowers with down payments of less than 20% who meet the lender’s and the mortgage insurer’s underwriting requirements. The property must be a primary residence or second home. The premium for this mortgage insurance is paid by the borrower. The insurance premium is usually added to the mortgage balance and paid off over time. Insured mortgages are backed by mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC) or one of two approved private mortgage insurers, Sagen MI and Canada Guaranty. For a discussion on mortgage default insurance please see Mortgage Default Insurance.
How Much Down Payment is Needed for an Uninsured Mortgage?
Uninsured mortgages require a minimum 20% down payment.
When a borrower has a down payment of 20% or more of the home’s purchase price, mortgage default insurance is not required. Borrowers with large down payments more than 20% benefit from having a lower mortgage balance and, therefore, lower mortgage debt service costs over time. Uninsured mortgages are often referred to as low-ratio mortgages or conventional mortgages and comprise the largest component of the overall mortgage market.
Avoiding mortgage default insurance represents a nice savings, as the insurance premiums can be as high as 4.5% (depending on the loan-to-value ratio of the mortgage). Uninsured mortgages have higher interest rates than insured mortgages but the savings from carrying a smaller mortgage balance and not paying the insurance premium can offset this higher cost.
How Much Down Payment is Needed for a Rental Property Mortgage?
If you are considering purchasing a property for rental purposes, the minimum down payment is typically 20% of the purchase price. Rental property mortgages are not eligible for mortgage insurance. Some lenders will require more than 20% down payment for a rental property. This can often be driven by property type. For example, some lenders require 25% down payment for condo rental properties.
How Much Down Payment is Needed for an Alternative or ‘B’ Mortgage?
Alternative mortgages, also known as B mortgages, require a minimum 20% down payment. This can vary between lenders, with some requiring larger down payments for certain borrower or property profiles.
Alternative mortgages cater to borrowers who do not meet traditional prime mortgage lending criteria or have credit issues. Down payment requirements for non-prime mortgages vary based on the lender’s guidelines and the borrower’s creditworthiness.
How Much Down Payment is Needed for a Mortgage Refinancing?
Mortgage refinancing requires a minimum 20% down payment. Mortgage refinancings are not eligible for mortgage insurance. When refinancing an existing mortgage with a new lender, the maximum amount the lender can refinance is usually 80% of the appraised value of your home.
How Much Down Payment is Needed for a Private Mortgage?
Private mortgages require s minimum down payment of 20%. Private mortgage lenders often require down payments larger than this depending on the property type and location.
If you can’t qualify for a mortgage with an institutional lender in either the prime or B lending categories, you may find financing in the private mortgage market. These mortgages are funded by individuals or private lending institutions. These lenders charge very high interest rates and fees.
The foregoing examples discuss the minimum down payment requirements. Whatever category of mortgage you fall into, the lender may require a down payment from you that is larger than the minimum discussed above. Reasons for this may include issues with the property, your credit history or employment type.
What Funds Can be Used for a Down Payment?
Lenders prefer that your down payment comes from your own funds (bank accounts, savings, investments, etc.) but there are a few other sources that can be acceptable:
- Sale of existing home or property;
- Gift from immediate family member (except for a rental property)
- Equity borrowed from another property, usually via a refinancing of that property.
Mortgage lenders will look at where all your down payment funds came from and will usually want to see that the funds have been in your account for 90 days. It is good to prepare ahead of time to have the down payment set up, so you are not moving money around near to the closing date of the mortgage.
If the funds cannot be traced, come from a sanctioned country, or are gifted by a non-relative they will not be accepted by the lender.
What are Some Ways to Save for a Down Payment?
With high housing prices in many markets in Canada, saving for a down payment can seem daunting. But it can only happen if you get started. Commit to it and you may find that you can save the required amount faster than you thought.
Create a Budget
Evaluate your monthly income and expenses to determine how much you can set aside for savings. Track your spending habits and identify areas where you can reduce your current expenditures and allocate more towards your down payment fund.
Automate Savings
Set up automatic transfers from your primary bank account to a savings account set up for the down payment. This can lead to consistent savings without much effort. A First-Home Savings Account (FHSA) is the best way to save for a down payment. An FHSA provides tax advantages for first-time homebuyers, primarily a tax deduction as money is deposited and no tax when money is withdrawn to buy a house. See here for a discussion on the First Home Savings Account (FHSA).
Use Existing Savings
The Home Buyers Plan is available to first-time homebuyers. This federal government program allows eligible first-time homebuyers to withdraw up to $60,000 from an individual’s RRSP savings, tax free, to buy, build or maintain a qualifying home. The money withdrawn for this purpose needs to be paid back into the RRSP over the next 15 years.
There are other government programs that offer tax rebates or new housing rebates. Speak to an advisor to assess whether any of these programs can work for you.
Reduce Your Debt
Pay down debt so you reduce the cash flow you are sending to third parties for debt payments. Thereafter, those funds can be saved towards a down payment. An added benefit is that paying down debt improves your credit score, making it easier for you to qualify for a mortgage.
Family Support
Many mortgage borrowers receive gifts of funds from immediate family to help with the down payment. This needs to be arranged ahead of time so the lender can due diligence the source of funds. The giftor needs to provide a signed letter that details the gift and says the funds do not have to be repaid (i.e. it is a gift and not a loan).
Alternative Programs
There are some new programs available that may also help with a down payment. Rent-to-own businesses can help home buyers that do not have the minimum down payment. Another relatively new alternative is to enter a co-ownership with other parties that all share the down payment obligation.
Home Ownership Starts with Saving for a Down Payment
Understanding the down payment requirements for various types of mortgages is vital for prospective homebuyers in Canada. To secure the dream home you are hoping for you need to prepare ahead of time. Work with a professional advisor – an experienced mortgage broker - that can answer your questions, show you your options, and guide you through the process.
Our expert advisors at Frank Mortgage are here to help you. Frankly, getting a mortgage does not have to be difficult. Simply click below to book a consultation to discuss your mortgage needs with a licensed mortgage agent.
{insert Book a Consultation button here}
Down Payment Frequently Asked Questions (FAQ)
Can I get a mortgage in Canada with no down payment?
No, you need a down payment to get a mortgage.
Are there benefits to having a 20% down payment?
There are two main benefits to having a down payment of at least 20% of the property value:
- Your mortgage balance will be smaller resulting in lower debt service costs over time; and
- You will not have to pay for mortgage default insurance.
Is a down payment the same as a deposit on a home?
When you agree to purchase a home, you need to make a deposit with the seller. The deposit is likely smaller than the down payment required for the mortgage and is essentially part of your down payment. If you made a purchase deposit of $10,000 upon agreeing to purchase the property and your mortgage requires $30,000 down payment, then you only need to advance an additional $20,000 toward your down payment on closing of the house purchase and mortgage.
If I have the required down payment, will I definitely get a mortgage?
Not necessarily. While having the required down payment is a must, you still need to pass the lender’s underwriting which will assess your income, credit history, assets & liabilities, and the property.
What happens if my down payment is less than 20%?
You are eligible for a mortgage at most lenders with a down payment less than 20% if you are purchasing a property worth less than $1.5million. If your down payment is greater than 5% of the first $500,000 of property value and 10% of the value between $500,000 and $1.5 million you meet the down payment requirements for getting an insured mortgage.
Why do rental properties require a minimum 20% down payment?
Rental properties are not eligible for mortgage default insurance. In Canada, any mortgage that is not eligible for mortgage default insurance requires at least 20% down payment.
Can I use RRSP funds for a down payment?
Yes, if you are a first-time homebuyer. The Home Buyers Plan is available to first-time homebuyers, and it allows eligible first-time homebuyers to withdraw up to $60,000 from an individual’s RRSP savings, tax free, to buy, build or maintain a qualifying home. The money withdrawn for this purpose needs to be paid back into the RRSP over the next 15 years.
Can I use FHSA funds for a down payment?
Absolutely, if you are a first-time homebuyer. This is exactly what the FHSA account is meant for. First-time homebuyers can withdraw the funds from an FHSA to make a down payment on a home purchase.
How much down payment is required for a $1 million home?
$75,000 is the minimum down payment required for a $1 million home. The minimum is 5% of the first $500,000 of property value and 10% of the value between $500,000 and $1.5 million. For a $1 million home that means – 5% of the first $500,000 and 10% of the next $500,000, which is equal to $75,000.
