Do You Need a 20 Per cent Down Payment on a Home in Canada?

If you are in the market for a house, you have probably heard that a 20-per-cent down payment is standard. With home values continuing to rise from Atlantic Canada all the way to British Columbia, that can be a challenge for aspiring homeowners. What are the advantages of making a 20-per-cent down payment, and what are the alternatives?

How to Calculate a 20-Per-Cent Down Payment

To calculate a 20-per-cent down payment, simply multiply the price of the home by 0.20 (or divide it by 5). For example, for a $500,000 home, a 20-per-cent down payment would be $500,000 X 0.20, or $100,000.

Is a 20-Per-Cent Down Payment Necessary?

It is not mandatory to have a 20 per cent down payment in Canada unless the home is over $1.5 million. At lower prices, it is possible to buy a home with as little as 5 per cent down. However, putting down a larger percentage does have distinct advantages.

Advantages of a 20-Per-Cent Down Payment

There are both long- and short-term advantages of putting a minimum 20 per cent down on a home:

Increasing Your Chance of Getting a Mortgage

Most home buyers get a mortgage to finance the purchase of their home. When you apply for a mortgage, the lender (usually your bank or mortgage broker) needs to have confidence that you will be able to make your payments. Having 20 per cent down and additional cash flow for home-related expenses shows them that you have good financial and planning habits.

Lowering Your Mortgage Rate

In addition to increasing your chance of getting a mortgage, the higher down payment can also help you get a lower mortgage interest rate. In general, lenders see mortgage applicants with a higher down payment as less risky, enabling them to offer lower rates.

Lowering Your Mortgage Payments

With a 20-per-cent down payment, the amount you will need to borrow to finance your purchase will be lower. As a result, your mortgage payments will also be lower.

Avoiding Mortgage Insurance

If your down payment is less than 20 per cent, mortgage insurance is mandatory. Whether that insurance is through the Canada Mortgage and Housing Corporation (CMHC), Sagen, or the Canada Guaranty Mortgage Insurance Company, your premiums will range from 0.6 to 4.5 per cent of the total mortgage amount. The higher your down payment, the less you will pay in mortgage loan insurance premiums.

Paying Less Mortgage Interest

The total amount of interest you pay over the life of a mortgage adds up. With a 20-per-cent down payment, you lower the total amount of interest you pay.

Here is an example of how much interest you would pay with a 5%, 10%, and 20% down payment on a $600,000 home with a mortgage interest rate of 5%.

As you can see, putting 20 per cent down instead of five per cent could save a homeowner nearly $68,000 in interest over the life of the mortgage. That’s a significant long-term saving!

Paying Off Your Mortgage Faster

Most homeowners dream of a time when their mortgage will be paid off, and their disposable income can be used for retirement savings, vacations, or home renovations. With a higher down payment, your mortgage payments would typically be lower, but if you raise that to the monthly payments you would have with only five per cent down, you could be mortgage-free faster.

Here is a breakdown of how that could work with a $600,000 home and a mortgage rate of five per cent.

 With a 20-per-cent down payment, your mortgage could be paid off 6.5 years earlier. Just imagine what you could do with an additional 6.5 years of mortgage-free living!

Getting Instant Equity in Your Home

Equity is the part of your home that belongs to you. In addition to being a point of pride, equity also helps if you need to borrow money. Hopefully, that need will not arise, but if it does, equity in a house is excellent security.

What If You Do Not Have a 20-Per-Cent Down Payment?

A 20-per-cent down payment can be a serious obstacle to home ownership, but there are alternatives as well as programs that can assist you.

Make a Lower Down Payment

You can buy a home with as little as five per cent down. Although this will increase your payments, most peoples’ income increases over time, which makes mortgage payments easier to handle. Once your income goes up, you can choose to make higher payments or make occasional principal-only payments that will reduce the size of your mortgage as well as the interest you will pay over the life of the mortgage.

Increase the Amortization Period

You can now get a mortgage in Canada with a 30-year amortization, which will cut your payments. Keep in mind that you will pay more in total interest over the life of your mortgage, but your lender may allow you to double up your payments or make principal-only payments down the line.

Take Advantage of Federal and Provincial Programs

Look into the programs offered by the Canadian government and your provincial or territorial government. Here are some current options:

• The Home Buyers’ Plan (HBP) allows you to withdraw up to $60,000 from your RRSP. The amount you withdraw must be re-deposited in the RRSP within 15 years to avoid tax implications.
• The First Home Savings Account (FHSA) allows first-time homebuyers to save up to $40,000 tax-free, with an annual contribution limit of $8,000. Contributions are tax-deductible, and withdrawals for purchasing a home are tax-free.
• GST/HST rebates may be available.

Government incentives change frequently; be sure to check on the latest offers and take advantage of these opportunities to finance your new home!

Final Thoughts

Saving for a 20-per-cent down payment may seem overwhelming, but if you get started now, the dream of home ownership can be yours that much sooner. Working with a qualified real estate agent can help you stay realistic and informed as you go forward!

Ready to take the next step? Connect with a RE/MAX Agent near you to get started.