The funds required to make a down payment on a house can seem overwhelming. First-time home buyers and veteran house hunters alike can experience the same anxiety. But with the right information and a few savings strategies, it doesn’t have to be a source of stress.
Begin by finding out how much down payment you can afford for your new home. The amount of your down payment will influence the property you can afford and the type of mortgage you’ll receive.
Depending on your goal, you may consider ways to save more for your down payment or find alternate funding options. Find out how much you can afford to spend on your mortgage with our mortgage affordability calculator.
Sometimes saving for a down payment is as simple as making small changes to your budget or exploring other financing options. Both could help you save more money and reduce the amount of mortgage you need.
Minimum down payment requirements
There are a few guidelines around how much you need for a down payment for a house in Canada:
- For homes that cost up to $500,000, the minimum down payment is 5%
- For homes that cost more than $500,000 and less than $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance
- For homes that cost $1 million or more, the minimum down payment is 20%
Minimum down payment requirements
| Home price | $450,000 | $850,000 | $1,500,000 |
| First $500,000 x 5% | $22,500 | $25,000 | N/A |
| More than $500,000 and less than $1,000,000 x 10% | N/A | $35,000 | N/A |
| More than $1,000,000 x 20% | N/A | N/A | $300,000 |
| Total down payment | $22,500 | $60,000 | $300,000 |
Your down payment affects the type of mortgage you get
Your down payment amount determines if you have a conventional mortgage or a high-ratio mortgage. If your down payment is 20% or more of the property value, you'll get a conventional mortgage. If it's less than 20%, you have a high-ratio mortgage, and you may be required to purchase mortgage default insurance.
Mortgage default insurance is an additional insurance payment that protects the lender in case of default. The insurance premium depends on the amount you're borrowing and the percentage of your down payment. Premiums range from 0.6% to 4.5% of the mortgage amount. You can pay for the insurance when you buy it or just add it to your mortgage total1.
For those who want to avoid this extra fee, it's important to save enough for your down payment to hit that 20% threshold.
How to save for your down payment
Once you’ve determined the amount of the down payment you need, these strategies can help you meet your goal:
- Set a monthly savings goal and track your success
- Put aside money each month as if you're paying a mortgage already
- Save your work bonuses, pay raises and tax refunds
- Pay with cash instead of credit cards; you'll generally spend less overall
- Reduce your spending by cooking at home instead of eating out, and skip buying the latest gadgets and toys
- Find cheaper ways of doing things, such as taking staycations, using coupons and borrowing books from the library
Explore additional savings programs for your down payment
There are local and government programs set up to support first-time home buyers in their journey. These programs are intended to make home ownership in Canada accessible for more people.
Borrow from yourself
First-time home buyers may be eligible for the government's Home Buyers' Plan (HBP). You and your spouse or common-law partner may be eligible to withdraw up to $60,000 each from your Registered Retirement Savings Plan (RRSP), which could help with your home purchase costs.
You won’t pay any tax on the amounts you withdraw if you repay the total amount to your RRSP as required within the next 15 years. The repayment period starts the second year after you make your withdrawals.
Investigate community programs
The First Home Savings Account (FHSA) is a registered plan that’s designed to help you save for your first home, tax-free. Your qualifying contributions will be tax-deductible, like a registered retirement savings plan (RRSP). Your qualifying withdrawals will be non-taxable, like a tax-free savings account (TFSA).
You can contribute up to $8,000 annually, including any transfers from an RRSP. The lifetime contribution limit is $40,000. If you qualify to use your savings towards the purchase of a qualifying home, you can withdraw money from your FHSA, tax-free.
You can use savings from your RRSP Home Buyers’ Plan (the HBP) and your FHSA towards the purchase of the same qualifying home purchase.
Save up to $40,000 tax-free with the First Home Savings Account
The First Home Savings Account (FHSA) is a registered plan that’s designed to help you save for your first home, tax-free. Your qualifying contributions will be tax-deductible, like a registered retirement savings plan (RRSP). Your qualifying withdrawals will be non-taxable, like a tax-free savings account (TFSA).
You can contribute up to $8,000 annually, including any transfers from an RRSP. The lifetime contribution limit is $40,000. If you qualify to use your savings towards the purchase of a qualifying home, you can withdraw money from your FHSA, tax-free.
You can use savings from your RRSP Home Buyers’ Plan (the HBP) and your FHSA towards the purchase of the same qualifying home purchase.
Final Thoughts
Buying a home in Canada starts with understanding your down payment requirements and creating a realistic savings plan. Whether you use government programs like the FHSA and RRSP Home Buyers’ Plan, adjust your spending habits, or combine both, every step you take brings you closer to your goal. With the right strategy and discipline, your dream of homeownership can become a reality sooner than you think.
If you're considering your first home buying or investing in real estate, or want to explore how these changes could benefit you, now is the perfect time to take action!
Source: Article from CIBC.
