When it comes to making a down payment on a house in Canada in 2023, there are a few important details to consider. The minimum down payment requirement in Canada (for all buyers) currently stands at 5% for the first $500,000 and 10% for any portion above $500,000. For example, on an $800,000 purchase, you would require $55,000 for the minimum down payment ($25,000 for the first $500,000 and $30,000 for the remaining $300,000 in excess of $500,000).
But don’t just rely on the minimum down payment requirement – it’s crucial to take a closer look at the circumstances because credit and purchase price can all have an influence on what your down payment will need to be. In this article, we’ll delve into some key considerations to help you make an informed decision.
Down Payment based on purchase price: The quickest way to determine your minimum down payment requirement is to consider the purchase price. In Canada, if the purchase price is $999,999 or below, you can do the minimum down payment. If the purchase price is $1,000,000 or above, you MUST have 20% down.
Down Payment based on the intended use of the home: In Canada, the minimum down payment rules only apply to owner-occupied residences. If the property is a investment (full rental, where no units are occupied by the purchaser), then 20% down is mandatory!
Down Payment based on monthly payments: There are several advantages to increasing your down payment beyond the minimum requirement. For one, it reduces the size of your mortgage, resulting in lower monthly payments. This can provide you with more financial flexibility and make budgeting more manageable. Additionally, a larger down payment can potentially secure you a better interest rate depending on the bank, saving you a substantial amount over the lifetime of your mortgage. A longer amortization is also an option available with a larger down payment (20% needed) and would also help reduce your monthly mortgage payment.
Down Payment based on default insurance: Another aspect to consider is the type of mortgage you choose. If you opt for a high-ratio mortgage (purchasing a home with less than 20% down), you’ll be required to pay for default insurance. While this insurance safeguards the lender in case of default, it does add a significant cost to your mortgage. Some homebuyers prefer to avoid this extra expense and instead put down a larger down payment to secure a conventional mortgage.
Down Payment based on credit score: It’s worth noting that if you have bad credit (below 600), the minimum down payment requirements increase to 20% of the purchase price, as this is the requirement of all Alternative Banks. This serves as a risk-mitigating measure for lenders since Alternative Banks (‘B Banks’) do not have default insurance.
Down Payment based on liquidity: Consider your short-term and long-term goals as well. If you anticipate needing available cash flow for other expenses or investments, it may be wise to stick with the minimum down payment. This way, you’ll retain more liquidity and have a safety net in the bank for unforeseen circumstances. Perhaps the home you’re buying might require work right away. Putting the minimum down payment will leave you with enough funds to complete the necessary renovations.
Down Payment based on goals: Short-term and long-term goals, personal affordability, and the type of mortgage you choose all come into play when determining the ideal down payment amount. While meeting the minimum requirements is a good starting point, especially as a first-time home buyer, it’s important to align your goals and financial capacity with your decision.
To sum it up, when it comes to making a down payment on a house, it’s important to look beyond the once standard, 5% rule. Personal factors, such as your credit, goals, affordability, and comfort level with default insurance premiums, should be carefully evaluated. By taking these factors into consideration, you can ensure that owning a home is a comfortable and manageable experience. If you have any further questions or would like more information on making a down payment, please don’t hesitate to contact us today! (905) 455-5005