What is the minimum down payment when buying a house?

The minimum down payment to buy a home as an owner occupant is 5%. However, if you only put a 5% down payment you will need to insure your loan with a mortgage insurer. The most popular one is CMHC but there are also two others, Genworth and Canada Guaranty.

There is a cost for securing the loan. This cost is added to the mortgage balance and is paid off over 25 years. There is also a 9% tax to be paid on this premium. The tax is payable directly at the notary.

It is also interesting to note that the percentage of the premium cost decreases with every 5% of additional down payment. The table below shows the cost of the premium.

Here is an example to illustrate the cost of the insurance premium at 5%, 10% and 15% for a purchase of $200,000.

Cost of the insurance premium according to the percentage of down payment

Downpayment home

As you can see from the table, there is an advantage to accumulating a little more money than the minimum to save on the cost of the premium. By the way, if you accumulate a 20% down payment you will not have to pay the insurer’s premium!

The upside of having an insured loan is that because the bank is incurring less risk with your loan it can offer you a better rate. In fact, more and more banks are offering better rates for an insured loan than for conventional loans. The difference is not huge but it’s the little things that count!

Is 5% always the minimum down payment for a house?

No, for homes over $500,000 you will need to invest a little more than 5%. You will need to put 5% for the first $500,000 and then 10% for the portion exceeding $500,000. So, for a $600,000 property, the minimum down payment is as follows:

$600,000 – $500,000 = $100,000 (the excess portion)

5% of $500,000 = $25,000

10% of $100,000 = $10,000

Therefore, the minimum down payment is $35,000

Also, properties that are more than a million dollars are not insurable. In other words, if you are looking to buy a home that is worth more than a million dollars, you will need a down payment of at least 20%.

Startup costs

You probably already know but there are certain costs associated with the purchase of a home, in particular, notary fees, real estate transfer rights (more commonly known as the welcome tax), building inspector….

These amounts are referred to as start-up costs. The reason I am bringing this up is that the bank will want to make sure that you have the necessary funds to pay these fees when the time comes. So, before you get your bank approval, you must prove that you have the down payment AND the start-up costs.

We estimate the start-up costs to be 1.5% of the price paid for the home. Thus, before buying a $200,000 home you need to show the bank that you have at least $13,000.

Minimum down payment (5%) = $10,000

Startup costs (1.5%) = $3,000

Obviously, it is always preferable to have a little more than the minimum amount. You will also need to prove that you have the money for the start-up costs whether or not the loan is insured.

Down Payment Without insurance?

If you would prefer to avoid paying this premium, then you must put a down payment of 20%. You will then have a conventional mortgage loan and you will not have to pay any insurance premiums or the 9% tax on the premium. In some exceptional cases, the bank will ask for the loan to be insured even if the buyer has the 20% down payment.

Besides saving money on the premium, another advantage is that some lenders will let you amortize the loan over 30 years. You would therefore reduce your monthly mortgage payments.

I do not plan on making this property my primary residence

In some situations, it is possible to buy a property that will not be your primary residence with only a 5% down payment.

Family members

If you would like to buy a house for a member of your immediate family, it is possible to only put a down payment of 5%.

Minimum down payment for a cottage

It is also possible to buy a secondary residence, such as a cottage, with as little as a 5% down payment.

Down Payment for Rental property

However, it is not possible to buy a rental property with only a 5% down payment. To complete this purchase, you will need a 20% down payment for a property with 4 units or less or at least 15% down payment for a property with 5 or more units. For additional information, I invite you to consult this article on minimum down payments for different types of rental properties.

Is the 5% down payment only for first-time buyers?

No, the purchase of a primary residence or a cottage with less than a 20% down payment is not only for first-time buyers. However, it is interesting to know that CMHC allows buyers to only have one insured loan with them. But, as previously mentioned, two other insurers will allow you to have multiple properties insured at the same time.

Why must we pay an insurance premium on the loan?

You must pay this premium because there is not enough equity on the property. In other words, if you ever stopped making payments and the bank were to take over the house, they would run a very high risk of incurring a loss. By insuring the loan, the bank guarantees it will not suffer any loss even during repossession.

It is very important to understand that even if we are talking about an insured loan when you put less than a 20% down payment you are not the one insured, it is the bank who is insured in the event of payment defaults on your part.

Basically, it is never fun to pay fees, but without CMHC you would have to wait until you have accumulated at least a 20% down payment before buying a home. So, CMHC allows you to become a homeowner earlier which is a very good thing! If you are a first-time home buyer, I invite you to check out the article where I discuss the different programs and tax credits to help first time home buyers. There is also an article that speaks about the new incentive for first time home buyers.