Understanding the intricacies of a mortgage down payment in Canada is essential for a smooth and successful home purchase. Here, we’ll go over the most crucial facts you should know regarding down payments in 2024 so you can plan ahead of time and avoid surprises before closing:
Whether you are a first-time buyer or updating your home, the minimum down payment across Canada is 5% of the first $500,000 of the purchase price. In other words, the down payment for a $500,000 home would be $25,000.
However, for any purchase price greater than $500,000, the minimum down payment is 10%. For instance, if the house is worth $750,000, the down payment would be $25,000 for the first $500,000 and another $25,000 for the remaining $250,000. Understanding that every dollar of the purchase price above $500,000 will demand a 10% down payment, as opposed to the first $500,000 (which requires a 5% down payment) is crucial.
Based on various purchase categories, the market’s minimum down payment amounts are as follows:
- Owner-occupied residence: add the first $500,000 ($5%) and the subsequent $500,000 ($10%) to determine the minimum. 20% down payment is required for owner-occupied homes in order to avoid paying the CMHC premium.
- Rental property: The minimum down payment required by most lenders is 20%.
- Second-home: You can purchase a second house with as little as 5% down for family, recreational, or other uses. There isn’t a CMHC or default insurance charge when 20% down.
How down payment affects the mortgage interest rate?
The fact that the mortgage rate varies based on the down payment is a major surprise to many. In actuality, the largest determinant of your rate is most likely your down payment. The major down payment types and how they impact the interest rate are as follows:
- Less than 20% as down payment
This is a CMHC or ‘high ratio’ default insured mortgage. Because the lender is protected against borrower default, the lender has little to no risk associated, and can therefore offer some of its best mortgage rates across Canada. Most of the rates you see advertised online, are CMHC insured or high ratio mortgage rates.
- 20% down payment
The lender is exposed to default risk at 20% down payment since the CMHC no longer protects them against default. It is also the most risk a lender can take on because it is the lowest/minimum down payment in this context. As a result, rates tend to increase slightly at the 20% threshold.
- 25% & more down payment
Lender risk declines with increasing down payment, and rates start to decline in line with this, moving closer to the levels associated with “high ratio” rates. A 25% down payment will almost always get you their lowest rate. Some lenders need a down payment of up to 35% in order to get their lowest rate.
So, these were some of the latest down payment rates you must be aware of before applying a mortgage. For more details, give our mortgage brokers a call today.