Shopping around for a new home with all the different costs and real estate jargon becomes overwhelming, especially if you’re just looking to upgrade to a bigger house or downsize once the little ones have left the nest. Whether you’re changing provinces or have your eyes set on the breathtaking home right down the street, purchasing your first or fifth home, we’re here to help.
Don’t let your confusion surrounding making a down payment for a house or rising prices in the Canadian housing market deter you from making the purchase of your dreams. Below, our team at Insurdinary outlines down payments and how to become the proud owner of your first house sooner.
Another factor which is top of mind lately are rising housing costs as they putting future homeowners in a difficult spot. Housing affordability affects everyone differently of course but a study conducted by RE/MAX revealed the key reasons why consumers are having a tough time purchasing homes in today's market. The findings showed:
- 26% - salary shortfalls
- 11% - household debt
- 18% - have an innate fear of being "house poor"
- 16% - trouble finding steady employment
- 18% - rising interest rates
- 11% - mortgage stress
What is a Down Payment?
As soon as you decide you’re ready for a change of scenery, you start looking for a home, wondering if you have enough saved up to make a down payment. Typically, it takes years to save the funds necessary to purchase a home in any housing market, and many continue to set funds aside as they further their home search. But what exactly is a down payment?
A down payment is a fraction of the overall cost of the home that you pay upfront. Since the down payment cost heavily correlates with the total house cost, the more expensive your new home, the more you pay upfront. On average, the down payment for a house costing $500,000 or less begins at 5%, meaning if you’re considering a home of this amount, you’ll pay at least $25,000 upfront.
How Much Down Payment for a House?
When it comes to down payments, bigger is usually better. The bigger the down payment, the smaller the mortgage.
The journey to buying a home usually begins years before the actual transaction happens because most people need to save for years before they can save for a down payment. But you don’t necessarily need to put 10% or 20% down to buy a house in Canada.
Canada’s lending rules have specific guidelines around minimum down payment sizes:
- If the purchase price is less than $500,000, the minimum down payment is 5%.
- If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% of the first $500,000, and 10% of any amount over $500,000.
- If the purchase price is $1,000,000 or more, the minimum down payment is 20%.
Using data released from the Canadian Real Estate Association (CREA) in 2021, the average cost of a home in Canada was $663,500. As of 2022 however, the CREA reports that those prices have skyrocketed by 20% bringing the average cost of a home in Canada to a whopping $816,720. With a house at that price point, your minimum down payment would look something like this:
- 5% of $500,000 = $25,000
- 10% of $316,720 = $31,672
- Total cost of down payment = $56,672
These numbers can also increase if you cannot put 20% down by way of mortgage insurance which is mandatory if you can't meet the 20% minimum down payment requirement. Learn more about how mortgage insurance works by referring to this article.
Not everyone gets by with a minimum down payment. There are cases where a lender may require a bigger down payment in order to approve you for a mortgage.
People who are self-employed or have a poor credit history, for example, often need to put down more than the minimum. And if the monthly mortgage payments on a particular home are too big for a homebuyer’s budget, a larger down payment may be required to reduce the size of the mortgage — and the size of those payments — to a more manageable level.
Can You Buy a House Without a Down Payment?
Also known as zero down mortgages, the answer is Yes and No. Yes, if you will pay the whole amount of the house right away and No, if not. Canada has specific rules around minimum down payments that have been in place since 2008. You’ll have to put at least 5% down to get a mortgage for a home priced less than $500,000. More expensive homes require even larger down payments.
How Exactly Does a Zero Down Mortgage Work?
While it's difficult in Canada to buy a home with zero down, it's not impossible. "Zero down" however, doesn't mean you are able to bypass the process of a putting money down on your new home altogether. It simply means that you are borrowing the money for it from a lender, usually a financial institution. This means that you are not only going to have to pay back your mortgage loan, you're taking on an added debt by having to pay back the loan for your down payment. This route is one that people only with excellent financial footing should take.
It's critical to keep closing costs in mind. Home inspections, legal fees, land transfer taxes can all add up so understanding where the funds to cover those costs is going to come from is wise. If you are looking to take on a loan for your homes down payment, here are the credit types available to do so:
- Bank of Parents - It's a real thing and according to a report conducted by CIBC, 30% of Canadian homebuyers in 2020 turned to Mom and Dad for their down payment needs. If this is option available to you, it's wise to consider it. Your family likely won't expect that your payment plan begin right away and your interest rates, if any at all, will be very low
- Personal Loans - Taking out this type of loan is the most common, and advisable. A financial lender works with you according to your personal situation and can determine a repayment option that makes sense.
- Line of Credit - Lines of credit usually comes with better interest rates. Bear in mind, using the same lender for both down payment loan and mortgage loan is not possible.
- Credit Card - Borrowing from your credit card is not recommended. Cash advances come with punishing interest rates of typically 20% and you will be required to begin it back within 30 days. At all costs, it's best to avoid this option altogether.
How to Save for a Down Payment?
Whatever real estate transaction you make, saving for a down payment for a house can be tricky, especially if you live in Vancouver, Toronto, or any other city with a high cost of living. That makes putting funds aside difficult and the saving process longer. However, once you do your research and have a better understanding of spending limits and preferred locations, set a monetary goal.
If a 5%, 10% or 20% down payment feels like an awfully big number, you’re not wrong. Below are the 4 tips to help you save and/or find loan sources for a mortgage down payment. The best way to save up a down payment is to start early.
Set your Budget
Review your budget and see where if there are places to reduce costs and save money. While reducing your day-to-day expenses will help, prepare to make even greater sacrifices in pursuit of your goal. This might mean cancelling out vacations, holding off on upgrading your devices, or getting a used or a cheaper vehicle until you’re a homeowner.
Our article specifically dedicated to first-time home buyers is a good place to start in determining your readiness towards buying a house.
Reduce your Debt
It’s hard to save if you’re making monthly payments to creditors, so consider paying off your debts. An added benefit is that reducing debt will improve your debt service ratios, making it much easier for you to qualify for a mortgage. As well, be mindful of where your money is going. Often, people don't calculate just how much dough they fork out for things like coffee shops, spontaneous purchases and subscriptions.
Avail Home Buyers' Plan from your RRSP
Dipping into your retirement savings for a down payment is an option you should approach with caution, but it can be a way to become a home owner on a faster timeline. If you have a registered retirement savings plan (RRSP) you can borrow up to $35,000 from it, tax-free, for your first home as part of the Home Buyers’ Plan. That $35,000 could make up a significant chunk of your down payment.
Open a Tax-Free First Home Savings Account
Set up a savings account for your down payment. In the 2022 budget, the federal government announced the creation of a new vehicle to help Canadians save for their down payments. Tax-Free First Home Savings Account, which is expected to become available in the beginning of 2023. Essentially, it's a tax shelter that allows you to make tax deductions on your contributions, and any money it earns is tax-free as well. Moreover, when you withdraw money from it, unlike in the case of an RRSP, you won't need to pay it back.
Average House Down Payments According to Province
The typical Canadian home costs around $650,000 in today’s market, making the average down payment $40,000. Still, like house costs, a down payment for a house also varies depending on the province. Below are the five most popular Canadian provinces, from highest to lowest affordability rate.
Quebec
Quebec has an average home cost of about $449,700 and a down payment percentage of 14.68%, making it one of the lowest in the market. That leaves new residents paying $58,500 in upfront costs to secure a home in this province.
Alberta
Alberta closely follows Quebec with a 15.15% down payment percentage. While the average home price is slightly lower than those in Quebec, costing around $442,800, new residents pay about $4,500 more in down payments for a standard total of about $63,000.
Nova Scotia
In prior years, Nova Scotia battled Quebec for the lowest down payment costs at a shocking 14.26%. However, by mid-2020, Nova Scotia’s percentage increased to 18.54%, currently placing it third on our list.
Although a Nova Scotia down payment percentage is now more than 3% higher than Alberta, it has the lowest home price, falling just below Alberta with a $363,300 cost. Still, the average $57,800 down payment cost for one of the most economical homes on the market leaves you paying lower interest rates on your monthly mortgage payments.
Ontario
Unlike the former three provinces where home buyers pay a down payment under 20%, new Ontario and British Columbia residents pay down 20% or more on their preferred houses. In Ontario, houses almost double in cost, with the average home price of $866,300. These expensive homes come with a 20.35% down payment, which adds up to over $140,000 in upfront fees.
British Columbia
British Columbia shares a similar market price as Ontario, with an average home price of $916,700. As one of the most expensive Canadian housing markets, residents tend to pay 22.45% or $159,800 as down payments on their new houses.
First-Time Homebuyer Incentive
If you’re a first-time homebuyer concerned that saving money may take too long, the Government of Canada has multiple programs to assist with payments. The Home Buyers Plan allows each new resident to withdraw up to $35,000 from their respective Registered Retirement Savings Plans that they can put toward their shared down payment.
However, you must begin paying off this loan the second year after you make the withdrawal. From there, you have 15 years to repay the total amount.
The First Time Home Buyer Incentive has also been helping new homeowners since September 2019 by lowering monthly mortgage payments. The FTHBI is a shared equity mortgage that gives both the borrower and mortgage provider shared ownership of the new home. As part of this interest-free program, a homebuyer doesn’t need to repay the loan for 25 years or unless they sell the house.
Down Payment FAQs
Here are more frequently asked questions about house down payment:
From the above provinces, a home buyer is more likely to purchase a $1,000,000 home from the pricier Ontario and British Columbia housing markets. With these more expensive homes come larger down payments for a house of 20% or more.
While this may seem overwhelming to some home buyers looking for a spacious home in a prestigious province, others prefer to pay a minimum down payment of 20% despite the home cost. Doing so helps them qualify for a mortgage loan without requiring default insurance.
Paying the financial institution’s mortgage insurance, whether in monthly mortgage payments or upfront, protects the mortgage company from missed payments. That’s because the less the borrower pays upfront, the more the mortgage provider is responsible for since it covers the remainder of the house’s overall cost. On the other hand, homebuyers who pay 20% in down payment costs are low-risk borrowers.
Unfortunately, other factors affect whether a borrower needs default insurance, despite their down payment percentage, including their credit history and employment status. Unemployed or self-employed persons with an unstable or fluctuating income may default on payments at any time. Bad credit scores also prove individuals unreliable with on-time payments.
So far, we’ve considered owner-occupied down payment percentages, which vary depending on location and house cost. However, the real estate transaction a homebuyer is interested in changes the minimum they must pay.
- Rental property: Mortgage companies refuse to provide mortgages on most rental properties if borrowers place a down payment of under 20%. Like owner-occupied homes, the 20% minimum helps individuals avoid the 4% Canadian Mortgage and Housing Corporation (CMHC) premium.
- Second homes: From summer houses to houses on wheels, second homes generally come with a lower down payment rate of 5%, similar to homes of $500,000 or less. However, like other down payments, choosing to pay 20% or more overrides CMHC premiums, reducing your mortgage loan and creating less interest over the 25-year amortization period.
The Takeaway
Before considering making a down payment for a house, figure out your mortgage affordability rate. Insurdinary’s mortgage affordability calculator analyzes your annual income, mortgage information, monthly debt payments, and living costs, accurately determining the maximum amount you can afford.
Depending on the cost of the home, the city in which you desire to live, current market rates and your ability to save, the cost of your down payment will vary. There are however, many options available to you as well should you need to finance your down payment. Our mortgage related articles are an excellent resource to educate yourself on the ins and outs of purchasing a home.
Once you're ready to step into home-ownership and shop for mortgage rates, consulting with an online mortgage comparison tool can not only save you thousands of dollars, but hours upon hours of time. Enter your mortgage type, purchase price, down payment, rate type and the province you live in and have dozens of side-by-side rates right at your fingertips. Applying for a mortgage has never been easier.
