Mortgage down payment


What is a mortgage down payment?

A mortgage down payment is the amount of money you pay upfront when purchasing a home. A down payment, typically expressed as a percentage, is calculated as the dollar value of the down payment divided by the home price.

The minimum down payment in Canada is 5%, with the typical down payment ranging from 5%-20% of the home price. According to a recent TD Canada Trust Home Buyers Report, 30% of home buyers plan to or have at least a 20% down payment, the point at which mortgage default insurance is no longer required.

Mortgage default insurance, commonly referred to as CMHC insurance, protects the lender in the case the borrower defaults on the mortgage. It is required on all mortgages with down payments of less than 20%, which are known as high ratio mortgages. A conventional mortgage, on the other hand, is one where the down payment is 20% or higher.

The size of your down payment influences three things


The amount you put down at the beginning of your mortgage shapes three important outputs over the life of the mortgage:

1.       The home price you can afford

2.       The size of your mortgage and monthly payment

3.       The amount of CMHC insurance you pay

1. Your down payment influences the home price you can afford

Because the minimum down payment in Canada is 5%, this benchmark is used to determine your maximum affordability. Ignoring your income and debt levels, your maximum mortgage would be [down payment $ / 5%]. For example, if you have saved $30,000 for your down payment, the maximum mortgage you could afford would be $30,000 / 5% = $600,000. Naturally, as your affordability is also a function of your income and debt levels, you should visit our mortgage affordability calculator for a more detailed analysis.

2. Your down payment shapes the size of your mortgage and monthly payment

A larger down payment reduces the size of your mortgage, and, therefore, the monthly payment and interest you will pay over the life of your mortgage.

For example, let us say you are considering a home at a value of $300,000 and are deciding whether to put down $25,000 or $40,000. The other mortgage inputs are as follows:

Home price: $300,000

Mortgage rate: 5.00%

Amortization: 25 years

Scenario A Scenario B
Home price $300,000 $300,000
Down payment $25,000 $40,000
CMHC insurance $5,500 $4,550
Total mortgage $280,500 $259,463
Monthly mortgage payment $1,631 $1,539
Total payments over 25 years $489,446 $461,616

Under Scenario B, the additional $15,000 put towards the mortgage down payment lowers CMHC insurance by approximately $1,000 and saves the homebuyer around $29,000 in interest over the life of the mortgage. However, it is also important to consider the opportunity cost, or alternative uses for the additional outlay under Scenario B. You must look at your expected returns associated with RRSPcontributions, stock investments, and/or debt repayments, for example, to make an informed decision.

3. Your down payment determines the amount of CMHC insurance you pay

As shown in the example above, CMHC insurance is a function of the amount of your down payment. Your CMHC insurance premium, calculated as a percent of your mortgage amount, gets smaller as you increase your down payment. To learn more about CMHC insurance and how it is calculated, please visit our CMHC insurance page.

Mortgage down payment sources


There are number of ways you can source funds for a mortgage down payment. Traditional sources include saving a fixed amount from every pay-cheque, selling stocks, bonds or personal property, or reaching out to immediate family, for example. Another great option is the RRSP Home Buyers’ Plan (HBP) which lets first-time home buyers withdraw up to $25,000 from Registered Retirement Savings Plans (RRSPs) for a home purchase, tax-free. Many first-time home buyers take advantage of this opportunity and set up RRSP accounts well in advance, with the intention to reap the rewards when it is time to purchase a house.

Non-traditional sources for a down payment include borrowed funds, and gifts from non-immediate family members. It is important to note, however, that when you employ non-traditional sources for your down payment, you will incur a CMHC insurance surcharge of 0.15% for down payments of 5% or less.1

Loan to value ratio


An alternative way to look at the down payment is to employ the Loan to  Value ratio (LTV), which describes the mortgage value in relation to the  home price (mortgage value / home price). A function of the down  payment percentage, it can also be calculated as [1 – down payment %].   For example, if your property is priced at $100,000 and your down  payment is $25,000, your required mortgage amount is $75,000 ($100,000 –  $25,000). Your down payment percentage would be 25% ($25,000 /  $100,000), and your LTV would be 75% ($75,000 / $100,000 or 100% – 25%).  The maximum LTV in Canada is 95%, as the minimum down payment is 5%.

[1] Canada Mortgage and Housing Corporation (CMHC)

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