Buying a home is one of the biggest financial decisions you’ll make in your life, and it comes with the question: “How much do I need for a down payment?” Whether you’re a first-time home buyer, upgrading to your next home, or buying a second property, understanding down payment requirements is essential to making smart, confident, and informed financial decisions.
In this blog, we’ll break down everything you need to know from the minimum down payment needed for a home to how it impacts your mortgage, including mortgage insurance. Plus, we’ll share how Mainstreet can support you with personalized advice and flexible solutions designed to help you succeed.
What Is a Down Payment?
A down payment is an upfront payment made when purchasing a home. This payment reduces the total amount you need to borrow from your lender. This money can come from various sources such as your first-home savings account (FHSA), personal savings, investments, or even gifts from family, but no matter the source, it must be properly documented for mortgage approval.
How Much Do You Need for a Down Payment?
The amount you need for a down payment on a home depends on several factors, including the price of the home and your financial situation. In Canada, the minimum down payment for a home is 5% for homes priced at $500,000 or less; for homes priced above $500,000, a down payment of 5% is required for the first $500,000, and then 10% for the remaining portion is required. There is no maximum amount for a down payment; however, a 20% down payment is often the benchmark to avoid mortgage insurance.
Let’s compare a 5% down payment vs a 20% down payment on a $500,000 home.
- With a 5% down payment, you’d pay $25,000 upfront, and you would have a mortgage loan of $475,000 plus mortgage insurance.
- With a 20% down payment, you’d need $100,000 up front, and your mortgage loan would be 400,000 while avoiding mortgage insurance.
There are lots of factors to consider when choosing the amount of a down payment you’re going to put on a home, and it is key to make sure the down payment amount works for you and your goals. When you meet with a Mainstreet advisor, we’ll walk you through your options to help you understand how your down payment affects your mortgage, so you can make the right financial decision.
What Is Mortgage Insurance and When Is It Required?
Mortgage insurance, often referred to as mortgage default insurance in Canada, is designed to protect the lender in case the borrower is unable to make their mortgage payments. It does not provide direct coverage to the homebuyer, but it enables buyers to qualify for a mortgage with a smaller down payment, as low as 5% of the home’s purchase price.
In Canada, mortgage insurance is required by law if your down payment is less than 20% of the purchase price of the home. This type of mortgage is called a high-ratio mortgage, and it comes with slightly lower interest rates compared to conventional mortgages. This insurance helps reduce the lender’s risk, allowing you to borrow with a lower down payment.
How Much are Mortgage Insurance Premiums?
Mortgage insurance premiums aren’t set by your lender—they’re set by the insurer, typically the Canada Mortgage and Housing Corporation (CMHC), which is a government-backed organization, or by another approved insurer like Sagen or Canada Guaranty.
Mortgage insurance premiums are based on your loan-to-value (LTV) ratio, which is the percentage of your home’s value that you’re borrowing. The higher your LTV, the higher your insurance premium. Here’s a breakdown of the mortgage insurance premiums you can expect, based on your Loan-to-Value (LTV) ratio:
| Loan-to-Value (LTV) Ratio | Premium Rate |
| Up to and including 85% | 2.80% |
| Up to and including 90% | 3.10% |
| Up to and including 95% | 4.00% |
These premiums are calculated as a percentage of your total mortgage amount and can be added directly to your loan, so you don’t need to pay them upfront. Additionally, if you amortize your mortgage over 30 years instead of the standard 25, an additional 0.20% premium rate applies. For example, a 5% down payment amortized over 30 years will be a 4.20% premium rate.
Based on our previous $500,000 home purchase example, when you pay less than a 20% down payment, you will be required to have mortgage insurance. For example, if you only pay a 5% ($25,000) down payment, you will be borrowing the other 95% ($475,000), and you will need to have mortgage insurance added. That extra premium, according to the above chart, will represent an additional 4% for mortgage insurance.
Comparing Down Payments, Mortgage Payments, and Premiums
Now that we’ve gone through the basics, let’s go through an example to compare the impact of buying a $500,000 home with a 5% down payment vs a 20% down payment. We’ll look at the total mortgage amount, insurance premiums, and monthly payments.
With a 5% down payment, your home’s down payment would be $25,000, leaving you with a mortgage amount of $475,000. Since this is considered a high ratio mortgage, mortgage insurance is required. Your insurance premium would be 4% of the $475,000 loan, adding $19,000 to the loan amount, bringing your mortgage to a total of $494,000.
At a 5-year high-ratio fixed interest rate of 3.99%, with a 25-year amortization, your monthly payment would be $2,595.86. After 5 years, you would still owe $429,971.58 on the mortgage.
Now let’s consider a 20% down payment on a $500,000 mortgage. In this case, you’d contribute a $100,000 down payment, and your mortgage loan would be $400,000. Because you’ve reached the 20% threshold, mortgage insurance is not required, which lowers your overall borrowing cost.
With a 5-year fixed mortgage at 4.34%, amortized at 25 years, your monthly payments would be $2,178.45. After the 5-year term, your remaining mortgage balance would be $350,348.98.
If a 25-year amortization feels a bit tight, you may be eligible for a 30-year amortization instead. This option is available with a down payment of 20% or more, and in some cases, less than a 20% down payment is required for first-time homebuyers or when purchasing a newly built home. Choosing a longer amortization can reduce your monthly payments, making it easier to manage your budget and cash flow.
Don’t forget that in Ontario and other provinces, PST applies to the insurance premium and must be paid at the mortgage closing, and it cannot be added to the mortgage.
Whether you’re aiming for a 5% or 20% home down payment, Mainstreet can help you evaluate all your options that fit your unique goals. Try comparing down payments yourself using our down payment calculator.
Saving for Your Down Payment
If you’re just starting to save for a home, there are smart ways to grow your money faster than with a standard savings account. Two effective options are the First Home Savings Account (FHSA) and the (TFSA).
The FHSA is designed specifically to help Canadian first-time home buyers save for their first home. It allows individuals to contribute up to $8,000 per year, with a lifetime contribution limit of $40,000. Contributions are tax-deductible, and the funds can grow tax-free within the account. When an FHSA is used to purchase a qualifying first home, withdrawals from the FHSA are also completely tax-free. From the moment you open your FHSA, you have 15 years to use the funds toward a home purchase.
Once you have maxed out your FHSA, saving with a TFSA is a great next step. While contributions to a TFSA are not tax-deductible, any interest, dividends, or capital gains earned within the account are completely tax-free, and you can withdraw funds at any time, for any reason, without paying tax, ideal for flexible savings towards your down payment for a house.
At Mainstreet, we can help you open and manage both accounts, so you can reach your savings goals faster and save for a home down payment.
Make Home Ownership a Reality
Many factors determine the right down payment amount for your unique circumstances. Putting down as little as 5% is an increasingly common path to buying a home, especially for first-time home buyers. With options like mortgage insurance and high-ratio mortgage rates, and effective savings tools, there are lots of ways to save for a down payment that work for you.
Whether you’re just beginning to save or ready to explore your buying options, Mainstreet is here to assist you on your home ownership journey. Book an appointment or visit your local branch, and we can guide you through the process and help make your homeownership dream a reality with personalized advice catered to you.