When you’re considering purchasing a home in Canada, one of the first questions that comes to mind is: “How much do I need for a down payment?” Understanding the down payment requirements is crucial because it directly impacts your mortgage, monthly payments, and overall financial plan. This guide will walk you through everything you need to know about down payments in Canada, why a 20% down payment is often recommended, how much you should aim to save, and practical tips for achieving your savings goal.
What is the Minimum Down Payment Needed for a House in Canada?
In Canada, the minimum down payment depends on the purchase price of the home:
| Home Price | Minimum Down Payment |
|---|---|
| Up to $500,000 | 5% of the purchase price |
| $500,001 to $999,999 | 5% of the first $500,000 + 10% of the remaining amount |
| $1,000,000 or more | 20% of the purchase price |
The government of Canada has set these minimums to ensure buyers have some financial stake in their property and can afford the associated costs of homeownership.
For example, if you’re purchasing a home worth $600,000, you would need a minimum down payment of:
- 5% of $500,000 = $25,000
- 10% of $100,000 = $10,000
- Total minimum down payment = $35,000
Why is a 20% Down Payment Recommended in Canada?
While the minimum down payment for a home in Canada can be as low as 5%, it is often recommended that homebuyers aim for a 20% down payment. Here’s why:
- Avoiding Mortgage Insurance: If your down payment is less than 20%, you are required to purchase mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC). CMHC insurance protects the lender in case you default on your mortgage, but it can add thousands of dollars to your overall mortgage cost. A 20% down payment allows you to avoid this extra expense.
- Lower Monthly Payments: The larger your down payment, the less money you need to borrow. This results in smaller monthly mortgage payments and lower interest costs over the life of the loan. It can also give you more flexibility in your budget.
- Build Equity Faster: A larger down payment means you’re starting with more equity in your home from day one. This can be especially beneficial if home prices fluctuate, as you’ll have a cushion against market changes.
- Improved Mortgage Rates: A higher down payment can sometimes qualify you for better mortgage rates, as lenders consider you less risky if you’re putting more money down upfront.
So How Much Should You Save for a Down Payment in Canada?
The amount you should save for a down payment depends on several factors, including the type of home you want to buy, its price, and your financial goals.
Here are some examples based on different home prices:
| Home Price | Minimum Down Payment | Recommended 20% Down Payment |
|---|---|---|
| $400,000 | $20,000 (5%) | $80,000 |
| $600,000 | $35,000 | $120,000 |
| $900,000 | $65,000 | $180,000 |
| $1,200,000 | $240,000 (20%) | $240,000 |
While you can technically purchase a home with as little as 5% down, the benefits of saving for a larger down payment are clear: it can reduce your long-term mortgage costs and offer more financial security.
8 Ways to Save for a Down Payment on a Home
Saving for a down payment can feel like an overwhelming task, but with the right strategy, it’s entirely achievable. Here are eight practical ways to save for your down payment:
- Create a Budget: Start by creating a detailed budget that outlines your income, expenses, and savings goals. By tracking your spending, you can identify areas where you can cut back and reallocate funds towards your down payment.
- Open a High-Interest Savings Account: Set up a dedicated account for your down payment savings. Look for a high-interest savings account to maximize the growth of your funds.
- Automate Your Savings: Set up automatic transfers to your savings account each payday. Automating your savings helps ensure you stay on track and avoid spending the money elsewhere.
- Utilize the First-Time Home Buyer Incentive: If you’re a first-time homebuyer, consider applying for the First-Time Home Buyer Incentive. This program allows the government to provide up to 10% of the home’s purchase price to increase your down payment and lower your mortgage.
- Take Advantage of the Home Buyers’ Plan (HBP): Under the Home Buyers’ Plan, you can withdraw up to $35,000 from your RRSP without paying taxes on it, as long as the money is used for a down payment on a home. If you and your spouse are both first-time buyers, you can each withdraw up to $35,000, for a total of $70,000.
- Cut Unnecessary Expenses: Look for ways to reduce your discretionary spending. This could include dining out less, canceling unused subscriptions, or cutting back on luxury items.
- Consider Additional Income: You can accelerate your savings by taking on a side job, freelancing, or selling unused items.
- Use Windfalls Wisely: If you receive a tax refund, bonus, or inheritance, put that money directly into your down payment fund. These lump sums can make a significant difference in reaching your goal faster.
What If You Don’t Have Enough Money for a Down Payment on a Home?
If you don’t have enough for a down payment, you still have options to consider:
- Seek Assistance from Family: Many first-time homebuyers in Canada receive help from family members in the form of gifts or loans to cover their down payment. However, keep in mind that any loaned amounts need to be disclosed to your lender.
- Look Into Down Payment Assistance Programs: Some provinces and municipalities offer down payment assistance programs. These can help bridge the gap if you’re just shy of reaching your down payment goal.
- Buy a Less Expensive Home: If you’re struggling to save enough for a home in your preferred area, consider purchasing a smaller or more affordable property, or look for homes in different neighborhoods.
- Wait and Save More: If you’re not in a rush to buy, consider delaying your purchase to give yourself more time to save for a larger down payment.
Frequently Asked Questions (FAQs)
1. Can I buy a house in Canada with zero down payment?
No, Canadian law requires at least a 5% down payment for homes priced below $500,000.
2. What is CMHC insurance, and why do I need it?
CMHC insurance is mandatory for down payments under 20%. It protects the lender in case of mortgage default and can add a one-time premium to your mortgage.
3. How does the First-Time Home Buyer Incentive work?
The First-Time Home Buyer Incentive offers a shared equity mortgage with the government contributing 5% or 10% of your down payment to reduce your mortgage size.
4. Should I use my RRSP for a down payment?
The Home Buyers’ Plan allows first-time buyers to withdraw up to $35,000 from their RRSP tax-free, which can help boost your down payment.
5. Is it better to put down more than 20%?
If you can afford more than 20%, it can reduce your mortgage size even further and save you more in interest over the long term.
Conclusion
Buying a home is a major financial milestone, and understanding how much you need for a down payment is the first step. While the minimum down payment in Canada varies depending on the home’s price, saving for a larger down payment—ideally 20%—can save you thousands in mortgage insurance premiums and interest payments. Start with a clear plan and utilize the available resources to save effectively.
By implementing some of the strategies mentioned above, you’ll be well on your way to owning your dream home in Canada. Read more here
