In Canada there is a Minimum Requirement of 5% Down Payment to Secure a Personal Mortgage.
The Types of Properties you can Buy with 5% Down Are:
Personal Occupied Property – note previous home can be converted to Rental.
2nd Home that you or an Immediate Family Member are going to Occupy.
A 4 Season Vacation Home with Year Round Access.
20% down is Needed for Rental Properties, Investment Properties, and Refinancing a Property you already own.
Down Payment Sources
What is the Amount of Down Payment Needed in Canada?
The following table shows the minimum down payment rules for insured mortgages in Canada. if your down payment is less than 20% of the purchase price, you’ll need to purchase Mortgage Default Insurance. This is another cost to factor into your budget.
|Purchase price for home||Minimum down payment required|
|$500,000 or less||5% of the purchase price|
|Over $500,000 and under $1 million||5% on the first $500,000 of the purchase price 10% on the amount over $500,000|
|$1 million or more||20% or more of the purchase price|
Depending on the type of mortgage you are applying for, your lender could ask you for a down payment of 20% or more as a condition of the mortgage.
Down payment sources: 4 things to provide the lender
You need to know what your down payment options are because this will help you decide whether to buy now, save more money, or find another source of funds for the down payment.
There are several ways to secure the funds you need. The lender will typically require that the first 5 to 10% of the down payment come from your own resources. Except for borrowing money, all of the options below are considered to be your own resources.
Here’s what you’ll need to provide to show your lender you have the down payment:
1. You have the money in your account
If you have the money in your account (or will soon), you may be asked to show the source of income to prove that it is not a loan that you are required to repay. Depending on where the money comes from, you may be asked to provide:
- Three or more months of bank statements.
- Investment statements
- Notice of Assessment (to show an income tax refund)
- The purchase agreement from your previous home, if you’re using the money from the sale for your down payment.
- Transaction documents showing the sale of an asset, such as other property or investments.
- Transaction documents showing you’ve taken equity from another secured property you own.
2. You’re taking advantage of the Home Buyers’ Plan
If you meet the criteria to participate in the Government of Canada’s Home Buyers’ Plan, you can withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) ($70,000 for a couple) for your down payment. Keep in mind that you must repay this amount within 15 years, so be sure you factor this into your budget. Provide your lender with the approval documents from Revenue Canada as proof of where your funds came from.
3. You’re receiving the money as a gift
An immediate family member can give you the money for a down payment. An immediate family member can be a parent, child, brother, sister, grandparent or guardian. Non immediate family members can also gift the money to you. To prove the money is a gift, and not a loan, they will need to provide a Gift Letter Specific to the Lender that includes the following information:
- The giftor’s personal information (name, address, phone number)
- The giftor’s relationship to you
- The dollar amount of the gift
- The date they gave you the money (to be verified in your bank statements)
- A declaration that the money is a gift and does not need to be repaid
Your lender or mortgage broker may also have a standard form that the Giftor can complete instead of providing a letter.
4. You’re borrowing some of the money
Property is expensive, and there are many reasons why you may not have the full amount of your down payment saved when you see a property you wish to buy. There are some circumstances in which you may be able to use borrowed funds, such as a credit card, line of credit or other loan to get the balance of your down payment. Please keep in mind that any credit must be calculated as part of your debt servicing ratio and may lower the amount you are eligible to borrow for a mortgage.
Getting your down payment ready
As you get ready to close on your new house, there will be documents to sign and other conditions to be met. Some of these conditions will be time-sensitive, so you don’t want a delay caused by missing paperwork. Having your down payment ready to go is one less thing for you to worry about—ideally 90 days before you need it.
You’ll also want your down payment amount confirmed before you discuss mortgage insurance. The amount will influence whether you even need mortgage insurance; it’s not required with a 20% down payment.
Talk to your mortgage broker about the source of your down payment. They can advise you on any rules you must follow and documents you must collect.
Mortgages in Canada that do Not have a Minimum of 20% Loan to Value as Down Payment Must be Insured by one of the 3 Major Insurers in Canada, CMHC, SAGEN, CANADA GUARANTY. The Insurance Premium is Paid by the Borrower and Added into the Mortgage Amount.
Beyond your down payment: Preparing for closing costs
Saving to buy a home is so much more than putting together a down payment. Down payments receive all the attention as you save to buy a property.
If you take some time to plan for other expenses related to closing on your property, you won’t be surprised by the actual amount you should have set aside, on top of your down payment. According to the Canada Mortgage and Housing Corporation (CMHC), you’ll need your down payment plus 1.5% to 4% of the property purchase price for closing costs and other expenses. That’s a lot of extra money you may not have planned to spend.
Costs before closing
There are some expenses that come up before you make the down payment.
Home inspection fee
When making an offer on a previously owned home, a home inspection is often a condition of the offer. A home inspector will go over the house and provide a report about the condition of the home. Costs for this service will vary but you should plan for $300 minimum.
You will need to give the seller a deposit when you make an offer on the property. Once the offer is accepted, the deposit is placed in trust until the closing of the sale and is applied toward the down payment. So, this isn’t additional money you need to save, but you will need to have the funds ready. Remember, making an offer is looked at as a contract of sorts. If you are the reason the sale fails to close, the seller may be entitled to keep the deposit as compensation.
An appraisal estimates the fair market value of a property. A financial institution may want an appraisal of the property to ensure the mortgage is not worth more than the property. An appraisal is not usually required for insured mortgages (those with a down payment of less than 20%), but, according to CMHC, a professional appraisal may be required if a more in-depth assessment of the value of the property is needed. An alternative lender, like Bridgewater Bank, specializes in uninsured alternative mortgages, which means you provide a minimum 20% down payment and an appraisal.
Closing costs are expenses that must be paid at the time the title of the property is transferred to you. Here are the typical closing costs you should be prepared for:
You will need a lawyer to help finalize the sale, prepare the mortgage documents, and protect your interests. Fees will include the lawyer’s time and disbursements incurred during the transfer of the property.
Land transfer tax
Most provinces (besides Alberta and Manitoba) collect a land transfer tax, and the amount varies by province and the value of the property.
The lender may require you to have title insurance as protection against losses of a property ownership dispute, should there be one.
Property Tax Adjustments
Both the buyer and seller are responsible for paying property taxes for the portion of the year that they own the property. If the seller has pre-paid taxes for any months after the sale date, you will need to reimburse the seller for those costs.
Depending on the payment schedule for your mortgage, the closing date of the sale may not be the date of the first mortgage payment. Interest accrues on the mortgage principal from the date the mortgage funds are advanced to the date of the first payment date.
Other homeownership costs to consider
Most home buyers will have worked out a budget to pay for monthly expenses, such as their mortgage payments, property taxes and utilities. There may be costs such as homeowner association dues or septic tank testing and maintenance, which will vary according to the type of property and its location. There are also costs associated with moving, connection fees, renovations, landscaping, and purchases to maintain your home.
You may not be aware of the extra costs associated with things that tend to pop up right before possession or in that first month of homeownership. Here are two costs that you will need to be prepared for:
Mortgages with less than a 20% down payment must be insured through a high ratio mortgage insurance provider, such as Canadian Mortgage and Housing Corporation (CMHC) or Sagen (previously known as Genworth). You can opt to pay this money upfront or include it as part of the mortgage. Paying it upfront costs less over the long run because if it is added to the mortgage, you will pay interest on it. As a side note, if the purchase is in a province with PST, the PST on the insurance must be paid upfront.
Lenders require that all mortgages be insured against fire and other damage. You will need to purchase home insurance and provide proof to the lender.
Plan for closing costs
All of these extra costs can add up to thousands of dollars. Consider that 1.5% to 4% of a $400,000 property is $6,000 to $16,000. So, preparing for these costs will keep your stress lower, and you can plan for the amount you really need to save. This is especially true for first-time homebuyers who have never been through the mortgage process.
Work with your mortgage broker
Your mortgage broker is there to support you and help you navigate the journey to homeownership. Please ask any questions you have so you feel you understand the steps in purchasing your property.