There are minimum down payment requirements which will vary depending on the type of mortgage you wish to obtain. The amount of down payment can also affect the interest rate on your mortgage. It’s important to have an accurate estimate of the amount of money you need to buy a house. With that information, you can plan your expenses and save up accordingly ahead of time.
Though it may not be possible to tell you the exact amount of money you need because there are so many factors involved, you can use the following information as a guide along with mortgage down payment calculators to get a good estimate. In this article, you’ll get a rundown of how much you’ll need to pay when buying a home, including the most common fees, taxes, and how much you should expect to pay as a down payment.
Minimum mortgage down payments
The minimum down payment required depends on the purchase price of your home. It will also depend on whether or not you obtain mortgage default insurance. According to the Canada Real Estate Association, the average home price in September 2020 in Canada was $604,000. If we exclude home prices from the Greater Toronto Area and Greater Vancouver, then the average home price is $479,000. To keep things simple, we’ll use $500,000 as the baseline for calculating how much money you will need to buy a house. Adjust it up or down as needed to suit your situation.
For homes up to $500,000, you need a bare minimum downpayment of at least 5%. This means you may be able to buy a $500,000 home for as little as $25,000 down. For properties up to $1,000,000, the first $500,000 of the home requires a 5% downpayment and any amount above that requires a 10% downpayment. Finally, a property that costs more than $1,000,000 requires a minimum of 20% as downpayment.
Regardless of your down payment, it is still necessary to show that you can afford the mortgage and can continue to meet the monthly mortgage payments over time. This is in the form of required mortgage stress tests at federally regulated banks, which looks to see if you can afford your mortgage payments even if interest rates increase. Credit unions and private mortgage lenders are not required to conduct mortgage stress tests, so they can be an alternative option. Mortgage lenders may also require higher down payments if you have a poor or limited credit history, or if you are self-employed or a newcomer to Canada. For example, RBC requires a 35% down payment if you are a new immigrant to Canada without at least two years of employment history.
A larger downpayment would mean smaller monthly payments, making it easier to fit the payments into your budget, but of course it means a higher upfront cost now rather than later. You can save even more with a downpayment of 20% or higher as you wouldn’t need to pay for mortgage insurance, which can be up to 4% of your total mortgage value. That could translate into tens of thousands of dollars saved in mortgage insurance premiums.
CMHC mortgage insurance
Canadian Mortgage and Housing Corporation (CMHC) mortgage insurance is mandatory insurance that borrowers must take out if they have a downpayment of less than 20%. Although optional, mortgage lenders may also require you to obtain mortgage default insurance even if you make a down payment greater than 20%. Run as a federal Crown Corporation, CMHC mortgage insurance protects mortgage lenders against the risk of borrower default. The cost of the insurance ranges from 2.8% to 4% of the amount borrowed and is normally added to the mortgage total. Alternative private mortgage insurance providers include Canada Guaranty and Genworth Canada (Sagen).
Select provinces also charge a provincial sales tax on mortgage insurance premiums which cannot be added onto your mortgage total, namely Ontario, Quebec, and Saskatchewan. Excluding sales tax on the premium, the mortgage insurance premium is not an upfront closing cost but will instead be paid as part of your regular mortgage payments.
For example, if someone wants to buy a $500,000 property with a 5% down payment of $25,000, they will take out a mortgage of $475,000. With a 5% downpayment, CMHC mortgage insurance will cost 4%, or $19,000. This would be added to the mortgage for a total borrowed amount of $494,000. You can check your estimated insurance premium using Wowa’s CMHC insurance calculator.
|Down payment percentage||Mandatory CMHC insurance premium|
Even if someone can come up with a downpayment and afford the monthly payments for the mortgage and insurance premiums, that doesn’t mean they’ll qualify for a mortgage. In 2018, new mortgage rules were introduced that require every Canadian mortgage borrower to pass a mortgage stress test. Before, it was only required if you had a downpayment of less than 20%. Now, your capability to afford your mortgage will be tested using either the Bank of Canada’s 5-year benchmark rate or the rate your lender gives you plus 2%, whichever is higher, for uninsured mortgages. If our mortgage is insured, then you wil be tested on either the Bank of Canada’s five-year mortgage rate or the rate your lender gives you.
For example, if you put 20% down on a $500,000 home and your lender gives you a 4% interest rate, then you’ll have to qualify at a 6% interest rate. If you get mortgage default insurance, then you will only have to qualify at a 4% interest rate. You can use WOWA’s stress test calculator to find out if you meet the requirements.
Some mortgage lenders may require you to obtain mortgage insurance even if you make a down payment greater than 20%. For example, Scotiabank requires mortgage insurance if you make a downpayment less than 35% if you are self-employed or your income is based on sales commission. Mortgage rates on insured mortgages are often lower than those on uninsured mortgages. Interest savings can outweigh the cost of mortgage insurance premiums. The CMHC offers mortgage insurance even if you make a down payment greater than 20%.
|Down payment percentage||CMHC insurance premium|
|35% or more||0.6%|
Taxes and closing costs
Closing costs vary from region to region but we’ve created a simple closing costs calculator that itemizes the expected fees you’ll pay. These fees include legal services, home inspection, title insurance, government registration fees, and more depending on where you live. You can get a more comprehensive breakdown in our guide to closing costs. We take into account the taxes you’ll also be required to pay such as land transfer tax and, depending on the area, taxes (HST) on your CMHC insurance premium.
Land transfer taxes vary from place to place with some areas offering much lower rates and even rebates, especially for first-time homebuyers. Use our land transfer tax calculator to find out how much the land transfer tax will be in your area. For foreign nationals without residency or citizenship, certain regions in Toronto and Vancouver have an additional tax known as the non-resident speculation tax (NSRT) which is equal to 15% or 20% of the property value respectively. You may obtain a full rebate if certain conditions are met.
Don’t forget about the impact of mortgage rates
Closing fees will just be a small part of the total costs of owning your home. Your mortgage payments will be your primary expense over the years, and interest rates are the primary driver behind your mortgage payments. If you can get a low interest rate, you can reduce your mortgage payments significantly over the course of your mortgage. To demonstrate the impact of a lower rate, you can save $1000 a year on a $500k mortgage if you lower your mortgage interest rate by just 0.2% (20 basis points).
The Bank of Canada projected in October 2020 that they will hold their policy interest rate until 2023. They will also be redirecting more purchases from its quantitative easing program into longer-term bonds. This suggests that variable-rate mortgage holders can expect continued low-interest rates until 2023, and fixed-rates may also continue to stay steady or decrease further. You can compare both fixed and variable rates of any term on WOWA’s mortgage page
There are many costs associated with buying a home that goes well beyond just the down payment or mortgage interest. A Canadian citizen or permanent resident moving into a $500,000 property in Toronto can expect to pay around $8,000 in closing costs, a minimum of $25,000 as down payment, and $19,000 for their mortgage insurance premium. Knowing these costs in advance will help you avoid unpleasant surprises and make your home buying process that much smoother.