What is a Mortgage Down Payment?
The down payment on your mortgage is the deposit you will pay to your lender upfront at the beginning of the mortgage period when you purchase your home. This serves to add some protection for the lender to give them more confidence in your financial stability.
Typically a mortgage down payment will be expressed in the form of a percentage (e.g., 10%, 20% etc.), and this is based on the total purchase price of the property. For example, a 10% deposit on a $200,000 home would be $20,000. This does not include the legal fees associated with the purchase.
What is the Minimum Down Payment Required in Canada?
A common question is how little of a down payment can you get away with to achieve the mortgage and home you wish to buy. This generally depends on two key factors, the current purchase price of the home and the current economic situation. Generally speaking, lenders will be more likely to be lenient on down payment requirements when the economy is booming. However, they have also been known to drop requirements when the economy isn’t doing so well. The property market has dried up to incentivize individuals to buy property instead of saving.
As a general rule, the minimum down payment on a property in Canada can be broken down as follows:
- If the purchase price is under $500,000, then the minimum is 5%
- If the purchase price is between $500,000 & $999,999 then it is 5% on the first $500k and 10% on any amount above $500,000
- If the purchase price is over $1,000,000, then the minimum down payment is 20%
If your down payment is lower than 20%, you must have mortgage default insurance (or CMHC insurance). This acts as protection for the lender if you default on the mortgage. Any mortgage with a down payment of lower than 20% is deemed a high-ratio mortgage and is inherently more risky for the lender.
According to the TD Canada Trust Home Buyers Report, a study found that 30% of buyers in the market had paid or planned to pay at least a 20% down payment on their property purchase, which invalidates the mortgage default insurance requirement.
Why is your Down Payment Important?
- Influences what you can afford: If you want a $750,000 property, but you only have 5% of down payment, then think again! You would actually need a $50,000 deposit as a minimum on a property like this, which actually works out as more like 6.7%. It is also worth keeping in mind that your down payment isn’t the only factor that goes into calculating what you can afford. Your monthly/annual household income, as well as your level of debt, need to be factored in. Just because you have the correct down payment doesn’t mean you will be approved for the mortgage.
- Impact on monthly payments: If you have a larger down payment, your monthly payments will reduce as you borrow less. From a money-management standpoint, this can be highly beneficial to some.
- Determines your Mortgage Default Insurance: If you’re planning to buy a property with a 20% down payment, then you don’t need to worry about this. However, if your down payment is only 5%, then your CMHC insurance is 4%! This reduces as your down payment increases until you reach the 20% or more bracket.
What is an LTV? (Loan to Value)
An alternative way than lenders look at your mortgage is to base it on a “Loan to Value,” or more commonly referred to as an LTV. This depicts the mortgage value with the price of the property.
In simple terms, this is Mortgage Value / Home Price.
The mortgage value is the amount you need to borrow. For example, let’s say you’re buying a $500,000 property, and you’re putting a 10% down payment into the mortgage, this means you need to borrow $450,000:
$450,000 / $500,000 = 90% LTV
This is just an alternative manner to look at a downpayment from the lenders’ side. The MAXIMUM LTV in Canada is 95%, which equates to a down payment of a MINIMUM of 5%.