What is a Down Payment?
A down payment is the amount of money a homebuyer puts towards purchasing their home on closing day, while their mortgage covers the rest.
In Canada, the minimum amount that a homebuyer is required to put down depends on the property’s purchase price:
- If the property is purchased for $500,000 or less, buyers must have a down payment of at least 5% of the purchase price.
- If the purchase price is between $500,000 and $999,999 buyers are required to pay 5% of the first $500,000, plus 10% of the remaining purchase price
- If a property is purchased for $1,000,000 or more, buyers must put down at least 20% of the purchase price.
Why is this term important?
Down payments are important since the size of a buyer’s down payment can affect their home-buying budget, mortgage, financial risk level, and ongoing monthly costs. When a buyer has a higher down payment, their overall mortgage, and monthly payments, will be lower as a result.
Reaching a 20% down payment is ideal for most homebuyers as it removes the barrier stopping them from buying a home for $1,000,000 or above. A 20% down payment also removes the need for mortgage insurance.
If a buyer puts down less than 20%, they are required to purchase mortgage loan insurance. This cost is typically rolled into their mortgage, accruing interest and increasing their monthly carrying costs over the lifetime of their mortgage.
Here is an example:
For example, if a homebuyer is purchasing a home for $800,000 they will need to have at least $55,000 (5% of $500,000 + 10% of $300,000) saved for their down payment, plus additional funds for closing costs. The buyer would then take out a mortgage for the remaining $745,000