What You Need To Know About A Down Payment

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Even if you’ve bought homes before, you may not know everything you need to know about down payments. Perhaps the biggest reason for this is that the rules and guidelines surrounding down payments have changed considerably in recent years. And those new parameters have made down payments more complex than they were even just 10 years ago.

For context, many of the new rules surrounding down payments were enacted in response to the rapid increase in residential real estate prices across Canada. From mortgage stress tests to new guidelines for minimum down payments, they are designed mainly to minimize mortgage defaults. 

Minimum Down Payments & How They Work

For any home you buy, you must make a downpayment that meets the minimum requirements for the price of the home. 

The guidelines state that buyers must make a minimum down payment of 5% on the first $500,000 of the price of the home. In addition, the buyer must make a minimum down payment of 10% on any portion of the price that’s over $500,000.

For example, for a $1,500,000 home, the minimum downpayment the buyer must make is calculated as follows:

  1. 5% on the first $500,000 of the price of the home, or $25,000. Plus…
  2. 10% on the purchase price that’s over $500,000, in this case it’s 10% of $1,000,000, or $100,000
  3. This means the total minimum downpayment to buy a $1,500,000 home is $125,000. 

CMHC Premiums May Be Added to Some Minimum Down Payments

The down payment type listed above, 5% on the first $500,000 of the home price, plus 10% on the part of the home price above $500,000 is the minimum down payment you can make. But if that’s all you can pay, the Canadian Mortgage and Housing Corporation (CMHC) charges a mortgage insurance premium of up to 4% on your mortgage.

A down payment of 20% of the home price is the minimum down payment needed to avoid the CMHC premium. 

How Your Down Payment Affects Your Mortgage Rate,

Of course, the larger your down payment, the lower your monthly mortgage payments will generally be, depending on the mortgage interest rate.

What most home buyers don’t realize is that your down payment is one of the biggest influences on the mortgage rate you get. Here are three main levels of down payments  and how they affect the mortgage rate you get.

A Down Payment of Less than 20%

As down payments at this level are protected by CMHC default insurance, lenders are not at risk if the borrower defaults on the mortgage. That means the lender can offer their lowest rates on mortgages at this level

A Down payment of 20% to 25% 

A down payment of 20% or more does not require default protection, but that puts the risk of default onto your lender. 20% to 25% are the lowest down payments in this ‘unprotected’ down payment level, so they often see rates that are higher than those at the less than 20% level.

A Down Payment of 25%+

The larger the down payment, the lower the default risk is for lenders. That usually translates into mortgage rates that are lower than at the 20% to 25% level.

A Note About 20% to 25% Down Payments

While it might look like there isn’t an advantage in mortgage rates to make a 20% to 25% down payment, versus a less than 20% down payment,, the opposite is true. The less than 20% down payments are subject to a CMHC default insurance premium of up to 4%.

If you are buying your first home, get more tips in our “First-Time Home Buyers Guide”. 

 

About Us

With 35 years of success in real estate, Invidiata prides itself in understanding the needs of their clients, achieving their goals and developing long-lasting relationships. The founder, Christopher Invidiata, has been recognized as one of the most successful real estate professionals in Canada and for over 30 years recognized as one of RE/MAX’s leading residential realtors in North America while servicing the Oakville, Burlington, Mississauga and Toronto markets.

The Invidiata team’s expertise and exceptional service has attracted Canada’s most influential families and earned them the #1 ranking team in Canada for over ten years and the prestigious honour of being named the #1 RE/MAX Team worldwide, multiple times. Invidiata has appeared on major media outlets, including CBC, CTV, CHCH, Breakfast Television, and The Globe and Mail. 

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