How much of a down payment do I need?
How much of a down payment do I need?
Well…it depends.
This is a question I get asked often, and it’s a hard one off the bat because there are a lot of variables to consider. A better question to start with is – what is the maximum payment I am comfortable with and work back from there?
Why? Because the amount of down payment can affect things such as the amortization (or “life of a mortgage) allowed, right along with rate and associated costs.
To simplify things, the minimum down payment allowed is 5% on purchases up to $500,000. This means if you want to purchase a townhome valued at $500,000, you will need $25,000 down from your own resources.
What do I mean by ‘own resources’? The 5% cannot be borrowed funds (this includes borrowed from family or friends or even from your bank credit line). It can be savings, RRSPs (if you’re eligible to withdraw), or even a gift from family, but any gift must come with a signed letter that clearly states the funds are not repayable.
For purchase prices between $500-$1MM, you need 10% of the balance. So if the townhouse is priced at $600,000 you would need 5% of $500,000 ($25,000) and 10% of $100,000 ($10,000) for a total down payment of $35,000.
Any property that you put less than 20% down on requires a mortgage that is considered a ‘high ratio’ mortgage which are subject to a high ratio insurance premium (called a mortgage default insurance premium calculated at anywhere from 2.80-4.00% of the loan value) that can be added to the balance of the mortgage. You can calculate what that cost would be at https://www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-loan-insurance/homebuying-calculators/mortgage-calculator
If you put 20% down, then it is considered a ‘conventional’ mortgage, meaning that you are not required to pay any premium. With a 20% down payment, you can also, in some situations, amortize the mortgage over 30 years, which helps to reduce the payment. As a general rule (barring some unique situations) a few situations in which you must have 20% down are:
You are purchasing a property priced above $1,000,000
You are purchasing an investment property
You are purchasing a special risk property (i.e., remediated grow op, age-restricted strata complex)
So you may be asking – why does this high ratio default premium thing even exist? I believe that context is the most important factor in understanding all this mortgage jargon, so here goes nothing…
The more down payment you provide from your own resources, the more skin you have in the game. Meaning, if something were to happen (a job loss or market crash), you are statistically MUCH less likely to throw in the towel and walk away from the property. Consider the example of purchasing a car – let’s say you head to the dealership to pick up the used truck of your dreams and they agree to finance 100% of it, only as soon as you drive it off the lot, it starts rattling and smoking, and no amount of time and attention can get it back in working order. How likely are you to drive it back to the dealership, toss the keys at the salesman and say “you sold me a lemon, it’s your problem now”?
Now consider the same situation, only in this case the dealer required $10,000 cash down on the $50,000 purchase price of the truck. Even if the same problems were to occur, you’d likely try every avenue to get it fixed, and if that didn’t work, you may even try and sell it privately or for parts to try and recoup some of your $10,000 cost, right?
But that’s a car, right? That’s crazy to think it would happen with houses. Only that it did – back in the ’80s, when interest rates hit all-time highs, people were walking into banks and handing back the keys.
Banks have only been able to lend money as mortgages since the early 1950’s, and the goal of the high ratio mortgage program was to help Canadians with low down payments get access to housing. Today, mortgage default insurance helps lenders to manage the risk of borrowers’ “defaulting” (meaning, not paying their mortgage) so that a broader group of people can get into the housing market. It’s important to remember that this default insurance premium is not life insurance, nor is it house insurance – it’s, in fact, a coverage that insures the bank against loss.
So if you’re asking what amount you should put down the answer once again is…it depends. I still believe that the best way to start is with payment affordability, and from there, we can determine what’s possible. If stretching to put 20% down is going to eat up all of your resources and leave you nothing for moving costs or that new couch you desperately need, then it probably doesn’t make sense, and there are likely some high-ratio mortgage options that will better meet your needs.
Let’s talk.