Down payments: our practical guide

What’s a down payment? 

A down payment is the first payment you need to make in order to buy a new home. It’s a way of showing your financial institution that it’s safe to give you a mortgage and that you’re committed to repaying it. 

This down payment represents a percentage of a property’s purchase price. If your down payment is less than 20% of the purchase price, you’ll need to take out mortgage loan insurance, which protects the bank in the event that you’re unable to make your payments. You can take out this insurance with the Canada Mortgage and Housing Corporation (CMHC), or with insurance companies such as Sagen or Canada Guaranty. 

There are different ways of saving for a down payment. Knowing the benefits and requirements of each strategy will help you choose the one that best suits your needs. 

What’s the minimum down payment for a home? 

To determine the minimum payment requirements to buy a home, you need to consider: 

1. Your borrowing capacity 

This is the amount you can afford to borrow, depending on factors such as: 

• Your income 
• Your debt 
• Your credit score  
• Current interest rates 

A financial specialist can help you determine your borrowing capacity by comparing your gross monthly income to your debt. This debt-to-income ratio is a good indicator of the state of your finances and your ability to make your monthly mortgage payments. 

​​→​ Use our calculator to find out how much you could borrow for a home

2. The type of property you want to buy 

The down payment required for a high-value rental property will be calculated differently from the down payment on an undivided co-ownership. 

• Properties under $500,000
  ​​→​ In Canada, banks require a minimum down payment equivalent to 5% of the property’s sale price. 
• Properties over $500,000
  ​​→​ If the sale price exceeds $500,000, the minimum down payment will correspond to: 
• 5% of the first $500,000  
• 10% of an amount between $500,000 and $1.5 million 
• 20% of an amount in excess of $1.5 million
  For example, the minimum down payment for a $600,000 property is $35,000, i.e., 5% of $500,000 ($25,000) plus 10% of $100,000 ($10,000). 

What are the benefits of making a larger down payment? 

If your financial situation allows it, it’s in your best interest to opt for a down payment that’s higher than the minimum required. 

• You’ll reduce the total amount of your loan and, therefore, your recurring payments and the interest you pay. 
• If your down payment is 20% or more of a property’s purchase price, you won’t have to take out mortgage loan insurance. 

What are some common mistakes to avoid? 

When deciding on your down payment amount, make sure you don’t fall into these traps: 

• Inaccurately assessing your finances
  Take the time to calculate your income, debt, loans and monthly expenses. You’ll be in a better position to determine what you need to save and borrow. 
• Underestimating additional costs
  Don’t forget to include closing costs, solicitor’s fees, taxes, transfer duties, insurance and the cost of any renovations in your calculations. These amounts can add 2% to 3% to the total cost. 

→ See our article on the costs of buying a home

How do I save enough for a down payment? 

There are two tax-efficient savings accounts that can help you maximize your savings and reach the amount you need for a down payment sooner: 

1. The FHSA 

The First Home Savings Account (FHSA) is a tax-free savings account tailored to help you save for your first home. Contributions are tax-deductible, allowing you to grow your savings while lowering your tax bill. Plus, withdrawals are completely tax-free when used to purchase your first home. 

2. The RRSP 

The Registered Retirement Savings Plan (RRSP) provides tax benefits by allowing tax-deductible contributions and tax-free growth on your savings until withdrawal. 

The Home Buyers’ Plan (HBP) lets you withdraw up to $60,000 from your RRSP tax-free to purchase your first home, with up to 15 years to repay the amount. 

→ Check out our article on how the Home Buyers’ Plan works

Draw up a savings plan 

Making a savings plan is a great way to raise the money needed for a down payment on a house.  

• Start by assessing how much money you can put aside each month while meeting your financial obligations.  

→ Check out our article on how to save for your projects

• Then set a realistic timeline for achieving your goal. For example, if you’re planning to buy a new home in three years’ time and need to raise $30,000, you’ll need to save around $833 a month. 

Here are some other practical tips to help you save for your down payment: 

• Make a budget
  Keep track of your income and expenses to identify potential saving opportunities. Use our online tool to create a budget. 
• Reduce your spending 
  Cancel unused subscriptions, spread out restaurant outings and avoid impulse purchases.  
• Open a savings account
  Maximize your savings with a High Interest Savings Account or the tax benefits of a registered account such as an FHSA or RRSP. 
• Take advantage of automatic transfers
  Schedule automatic payments from your regular account to your savings account so you can put money aside without even thinking about it. 
• Increase your income 
  Look for other sources of income, such as a part-time job, working overtime or selling assets you no longer need. 

A gift from loved ones 

If you’re short on cash for your down payment, a contribution from your parents could make all the difference. However, banks do require certain documents when granting a mortgage: 

• A letter signed by the donor stating that the contribution is a gift and not a loan. It should include your name, your relationship, the date, the amount offered and a clear statement that no repayment is expected. 
• Proof of the donation, such as a recent bank statement. In most cases, the funds must have been in your account for at least 90 days prior to the mortgage application.  

A down payment is essential when buying your first home. The amount you put down can not only make it easier to get a mortgage, but can also give you certain advantages. Take the time to assess your finances, plan for additional costs and explore all your options. By carefully preparing your savings plan, you'll find it easier to achieve your goal. 

For advice that’s tailored to your specific situation, talk to your financial advisor. A successful property purchase requires good planning.