How Much Down Payment for a House Do You Really Need?

When it comes to buying a home, your down payment is an integral part of the equation. How much down payment for a house you pay, determines your mortgage payments, how much mortgage insurance you pay (if any), and the amount of equity you have in your home. The larger your down payment, the better. But saving for it isn’t always easy.

How Much Down Payment for a House You Need: The 20% ideal

When it comes to buying a home in Canada, 20% is the ideal down payment in order to avoid paying mortgage insurance premiums. However, with the average house in Canada now more than $500,000, few can afford to come up with the $100,000 or more required to put 20% down on their first home. Furthermore, in regions where housing prices are increasing by double digit percentage points each year, waiting to save up a bigger down payment might leave aspiring buyers priced out of the market. By the time you save up 20% to put down on a house, you might find prices have increased beyond your reach. So how much do you really need to become a homeowner?

The 5% minimum isn’t enough

Most people believe you need a down payment of at least 5% of the home’s value in order to buy. However, this isn’t always enough. When you purchase your home, you’ll need extra cash on top of the down payment to cover closing costs, including legal fees, title insurance, and a land transfer tax. These can add up quickly so make sure to earmark a few thousand dollars for these extra expenses. As of February of this year, if you’re purchasing a home that costs more than $500,000, you’ll need to put down 10% for any amount above that threshold. This means if you want to buy a $600,000 home, your down payment actually needs to be $35,000 (5% of the first $500,000, or $25,000, plus 10% of the remaining $100,000, or $10,000 for a total of $35,000). While this blended down payment rule only slightly increases the minimum amount required to purchase more expensive homes, for some buyers it’s enough to force them to take some more time to save. The unfortunate reality is a 5% down payment doesn’t give you 5% equity in your home. Because of mortgage insurance, which is added to your mortgage, most of your equity will disappear. This leaves you vulnerable to market fluctuations. If home prices go down by a small amount and you only put 5% down, you could end up with no equity in your home. While the minimum down payment might get your foot in the door, it’ll likely leave you with larger mortgage payments. This could negatively impact your savings for other financial goals, including retirement or starting a family. It’s worthwhile to take some extra time to save a bigger down payment if it’ll let you afford the rest of your life!

How Much Down Payment for a House You Need: 10% to 15% is better

If you want to reduce the mortgage insurance premiums you pay, establish more equity in your new home, and protect yourself against fluctuations in the real estate market, put at least 10% down when you buy a home. A 10% down payment is enough to reduce your mortgage insurance premiums to 2.4% from 3.6%, saving you thousands of dollars. If you can make a down payment of 15%, you’ll notice another drop off in mortgage insurance premiums to 1.8% from 2.4%. This will further increase the equity you get in your home, as well as reduce your mortgage payments. Smaller payments will keep more money in your budget, so you can afford more of the life you want.

The bottom line

Home ownership is a major financial milestone and a great way to steadily build long-term wealth. However, both rushing in with a small down payment or waiting too long in order to save more can leave you worse off. Make sure you save the amount you need to get the house you want, without putting financial strain on the rest of your budget. RateHub.ca is a website that compares mortgage rates, credit cards and deposit rates with the goal to empower Canadians to search smarter and save money.