When it comes to obtaining a mortgage in Canada, understanding the down payment requirements is essential. Your down payment plays a crucial role in determining the type of mortgage you can secure, and the interest rates you may qualify for.
Down payment requirements can vary depending on the type of mortgage you apply for - insured mortgages, uninsured mortgages, rental properties, non-prime mortgages, refinancing, and private mortgages. Whichever mortgage is right for you, a down payment is necessary.
Being prepared to get a mortgage to purchase a new home requires you to save for a down payment. If you haven’t started saving for a down payment, there are interesting ways to do so that we will discuss below.
How Does a Down Payment Work?
Mortgage lenders want a borrower to have some equity in the property. This is an investment by the borrower in the property that provides a cushion of protection for the lender, sometimes referred to as “skin in the game”. When someone purchases a property financed by a mortgage, they must have at least 5% of the property value in the form of a down payment that is to be paid upfront. For instance, if you are purchasing a property for $400,000, you need at least $20,000 of your own funds for the down payment, with the lender providing up to 95% of the property value, or $380,000 in this example.
The minimum required down payment may be greater than the above example and depends on the type of property and the type of mortgage.
Let’s review the minimum down payment requirements for the main mortgage categories.
Down Payments for Insured Mortgages
If the borrower has a down payment that is less than 20% of the home's purchase price, the mortgage lender will require mortgage default insurance. Mortgage default insurance is available to borrowers with down payments of less than 20% who meet the lender's and the mortgage insurer's underwriting requirements. There is s cost to this however, as the premiums for this insurance are paid by the borrower. The insurance premium is usually added to the mortgage balance and paid off over time. Insured mortgages are backed by mortgage default insurance from the Canada Mortgage and Housing Corporation (CMHC) or one of two approved private mortgage insurers, Sagen MI and Canada Guaranty. For a discussion on mortgage default insurance please see here Mortgage Default Insurance.
The minimum down payment requirements for insured mortgages are as follows:
For properties with a purchase price up to $500,000, the minimum down payment is 5% of the purchase price. A 5% down payment is only eligible for a primary residence or second home.
For properties with a purchase price between $500,000 and $1 million, the minimum down payment is 5% of the first $500,000, plus 10% of the value between $500,000 and $1 million.
Mortgage insurance is not available for mortgages on properties worth more than $1 million.
Down Payments for Uninsured Mortgages
When a borrower has a down payment of 20% or more of the home's purchase price, mortgage default insurance is not required. Borrowers with large down payments in excess of 20% benefit from having a lower mortgage balance and, therefore, lower mortgage debt service costs over time. Uninsured mortgages are often referred to as low-ratio mortgages or conventional mortgages and comprise the largest component of the overall mortgage market.
Avoiding mortgage default insurance represents a nice savings, as the insurance premiums can be as high as 4.5%. Uninsured mortgages have higher interest rates than insured mortgages but the savings from carrying a smaller mortgage balance and not paying the insurance premium offsets this higher cost.
Down Payments for Mortgages for Rental Properties
If you're considering purchasing a property for rental purposes, the minimum down payment is typically a minimum of 20% of the purchase price. This is the case for both insured and uninsured rental property mortgages.
Down Payments for Non-Prime or ‘B’ Mortgages
Non-prime mortgages, also known as B mortgages or alternative mortgages, cater to borrowers who have credit issues or do not meet traditional prime mortgage lending criteria. Down payment requirements for non-prime mortgages vary based on the lender's guidelines and the borrower's creditworthiness. Lenders offering non-prime mortgages may require a minimum down payment ranging from 20% to 35% of the property's value.
Down Payments for Refinancing
When refinancing an existing mortgage with a new lender, the maximum amount you can refinance is usually 80% of the appraised value of your home. Therefore, the down payment required for refinancing is typically a minimum 20% of the property value.
Down Payments for Private Mortgages
If you can’t qualify for a mortgage with an institutional lender in either the prime or B lending categories, you may find financing in the private mortgage market. These mortgages are funded by individuals or private lending institutions. These lenders charge very high interest rates and fees. Down payment requirements for private mortgages are determined by the individual or institution providing the loan. Most private lenders want to see a down payment of at least 35%. Some will lend with lower down payments, but it depends on the situation.
The foregoing examples discuss the minimum down payment requirements. Whatever category of mortgage you fall into, the lender may require a down payment from you that is larger than the minimum discussed above. Reasons for this may include issues with the property, your credit history or employment type.
It is important to also note that in many cases, the larger your down payment the lower the mortgage rate you will receive. This is mainly the case for uninsured mortgages where, for example, a 35% down payment will often result in a lower mortgage rate than a 20% down payment.
What sources can you use for a down payment?
Mortgage lenders will look at where all your down payment funds came from and will usually want to see that the funds have been in your account for 90 days. It is good to prepare ahead of time to have the down payment set up, so you are not moving money around near to the closing date of the mortgage. Lenders prefer that you down payment comes from your own funds (bank accounts, savings, investments, etc.) but there are a few other sources that can be acceptable:
Sale of existing home or property;
Gift from immediate family member (except for a rental property)
Equity borrowed from another property, usually via a refinancing of that property.
If the funds cannot be traced, come from a sanctioned country, or are gifted by a non-relative they will not be accepted by the lender.
