Unlike in the past, it is now mandatory to make a down payment when buying a property in order to obtain a mortgage loan. If your cash flow is insufficient, there are different ways to obtain the necessary funds for your down payment. You can find them here.
What is the minimum down payment (in percentage)?
First of all, you should know that you will have to pay at least 5% of the purchase price (after taxes and rebates) as a down payment for a home worth $500,000 or less.
For homes valued between $500,000 and $999,999, you will need to put down 5% on the first $500,000 and 10% on the amount over $500,000. Finally, the minimum down payment for homes worth $1 million or more is 20%.
Obviously, the larger your down payment, the less you need to borrow and the less interest you will pay on your mortgage.
Savings strategy: Since interest rates are currently low, it may be advantageous to make a smaller down payment (e.g. 20% instead of 30%) and obtain a larger mortgage in order to reinvest a portion of the amount borrowed in high-yield investments.
What happens if your down payment is less than 20%?
If you are buying a home worth $500,000 or less and you are putting less than 20% down, you will need mortgage default insurance. Mortgage default insurance is designed to protect the lender against default by the borrower. Mortgages that include this type of insurance are not provided by the banks directly, but rather by the Canada Mortgage and Housing Corporation (CMHC).
CMHC may also require a down payment of more than 5% if you are self-employed or have a bad credit history.
Since mortgage loan insurance premiums range from 0.60% to 4.5% of your loan amount, they will slow down the interest (and principal) payments on your loan. In an ideal world, you would avoid going to CMHC with a 20% down payment.
The Home Buyers’ Plan (HBP): up to $35,000 for your down payment
The HBP is a very popular program that allows you to withdraw up to $35,000 from a Registered Retirement Savings Plan (RRSP) when you buy your first home (those who have not owned a home in the 4 years preceding the purchase are also eligible).
A buying couple could therefore withdraw a total of $70,000 from their RRSP without paying taxes. However, the amounts withdrawn from the RRSPs must be repaid gradually over a period of 15 years.
More details on the HBP here.
Municipal programs: credits, rebates and interest-free loans
The City of Montreal, for example, offers new homeowners the Home Purchase Assistance Program, which provides a lump sum payment for the purchase of a new house or condo, or a refund of transfer duties if you purchase an existing eligible home (provided there is a child under 18 in your family).
This program is also open to those who already own a home and wish to purchase a residential home, under certain conditions.
The Family Access Program in Quebec City
Another beneficial municipal program, “Programme Accès famille” allows eligible families in Quebec City to receive an interest-free loan of 5.5% of the value of the home ($330,000 or less, including taxes and rebates) for the down payment.
Family donation (love money)
To make your home ownership project a reality, a relative or friend could give you a cash gift with no strings attached. This type of donation is generally not taxable.
Alternatively, it could be a loan, which you pay back to your relative or friend each month or however you choose. In this case, it is best to draw up a contract to protect both parties.
Personal loan and line of credit
Although their interest rates are often high, a personal loan or a personal line of credit could be a quick solution to make the required down payment. Your Xperto mortgage broker will help you determine if this option could be advantageous for you and negotiate with lenders the best mortgage interest rates for your situation.
Mortgage refinancing
If you already own a home, you can apply for a mortgage refinance to increase your loan (get up to 80% of your home equity). Use this money to cover major expenses, like a down payment on a second home!
Set up a savings plan to raise your down payment!
If you plan to buy a home in the next few years, start saving now. The best way to do this is to contribute to your RRSP as much as possible each year, as you will be able to take advantage of the HBP when you make your real estate transaction.
You can also put money into low-risk investments: you’ll make a better return than with a traditional savings account, while protecting yourself from market volatility.
Alternatively, opt for an automatic savings plan, which will take a predetermined amount of money directly from your paycheque and place it in a special account.