Understanding the ins and outs of a mortgage down payment in Canada is one of the keys to a smooth and successful home purchase. Here we will look at the most important things that you need to know about down payment in 2024, so that you can plan properly, and face no surprises before closing:
- How the minimum down payment works.
- The different kinds of minimum down payment.
- How a down payment works, with CMHC or mortgage default insurance in the picture.
- How a down payment influences the mortgage rate.
- The benefits of a 20% down payment
How the minimum down payment works
No matter if you are a first-time buyer, or are upgrading your home, the minimum down payment in Ontario and across Canada is 5% of the first $500,000 of home purchase price. In other words, the down payment on a $500,000 home would be $25,000.
However, on any purchase price over and above $500,000, the minimum down payment is 10%. So for example, if its a $750,000 home then the down payment would be $25,000 on the first $500,000 of the purchase price, and then $25,000 on the next $250,000 of the purchase price (for a total of $750,000 purchase price in this example).
The key to understanding is to differentiate between the first $500,000 (5% down on this amount) and that every dollar of the purchase price above $500,000 will require a 10% down payment.
The different kinds of minimum down payment
The following is a shortlist of the different down payment minimums in the market, based on different purchase types.
- Owner-occupied home: 5% on the first $500,000, 10% on above $500,000 – total the two to arrive at the minimum.
- Owner-occupied home: 20% down payment is the minimum to avoid the CMHC premium (as much as 4% if less than 20% is applied).
- Rental property: For most lenders, 20% is the minimum down payment on a rental.
- Second-home: A second home for recreation, family or other purposes can be bought with as little as 5% down payment. At 20% down, there is no CMHC/ default insurance fee.
How a down payment influences the mortgage rate
A big surprise for many, is that the mortgage rate changes depending on the down payment. In fact, a down payment is probably the biggest factor in determining your rate. Here are the main categories of down payment and how rate is affected:
Less than 20% down payment
This is a CMHC or ‘high ratio’ default insured mortgage. Because the lender is protected against borrower default, the lender has little to no risk associated, and can therefore offer some of its best mortgage rates across Canada. Most of the rates you see advertised online, are CMHC insured or high ratio mortgage rates.
20% Down payment
At 20% down payment, the lender is no longer protected by the CMHC from default and is therefore exposed to default risk. Because it is the lowest/ minimum down payment in this regard, it is also the most risk a lender can assume. Therefore rates are typically slightly higher at the 20% mark.
25%+ Down Payment
As down payment increases, lender risk decreases, and rates begin to fall accordingly, towards the levels seen with the ‘high ratio’ rates. For some lenders, 25% down payment gets you very close to their lowest rate. For some lenders as much as 35% down payment is needed to obtain their lowest rate.
The benefits of a 20% down payment
If you can get to 20% down payment, you’re better off with a slightly higher rate, than a payment a 3% – 4% CMHC premium.
The savings, in most cases, are easily in the thousands of dollars, with a 20% down payment Vs. a lower rate CMHC insured mortgage.
Even though your rate would be higher at 20% down, your cost of borrowing would be lower. There are a few instances where you may be better off paying the CMHC fee, and we encourage you to connect with us at Altrua to discuss these. But for most people, if you have the 20% down then you are better off with the higher down payment.
Also at 20% down payment, the 30-year amortization becomes available. With less than 20% down payment, a 30-year amortization is not available. A 30 year amortization in and of itself can have the benefit of increasing your purchase price if this is something you are looking for.
For more information on down payment, connect with an Altrua mortgage broker today!
