Understanding Canadian Down Payment Requirements

When you're planning to a buy a home, you must offer up a down payment. How much money do you need for a down payment in Canada, according to the law? Find out what you need to put down up front plus why it's a good idea to offer more, if you can.

What are Canada's Down Payment Requirements?

For homes that cost up to $500,000, the minimum down payment required in Canada is 5 percent of the purchase price. For example, if a home cost $280,000, you would need to put down 5 percent of $280,000, which is $14,000.

For homes from $500,000 to $1 million, you still pay 5 percent on the amount up to $500,000, plus 10 percent of anything over $500,000. If you were considering a home worth $620,000, you would pay 5 percent of $500,000 plus 10 percent of $120,000, for a total down payment of $37,000.

For homes over $1 million, the minimum down payment required is 20 percent of the home price.

In some cases, you may need to put down more than the minimum down payment. If you have poor credit or are self employed, your mortgage lender may require a larger down payment.

How Mortgage Loan Insurance Impacts Your Home Purchase

Putting down less than 20 percent in down payment requires you to purchase mortgage loan insurance. Even if you must put down just 5 percent to buy a home in Canada, it may be worth it to put down the full 20 percent if you can. Note, mortgage loan insurance is not available for homes over $1 million.

Mortgage loan insurance is insurance you take out to cover the mortgage lender's risk in loaning you the money. Mortgage loan insurance offers you, the home buyer, no protections. Anyone who puts down less than 20 percent—plus, in some cases, anyone who is self employed or has poor credit—must take out this insurance.

Mortgage loan insurance varies by the cost of your home plus the interest rate you are offered by your mortgage lender. Typical interest rates for this insurance vary from 0.6 percent to 4.5 percent.

To determine the premium on your mortgage insurance, multiply the amount of the mortgage (your home purchase amount minus your down payment) by the interest rate quoted by your lender. For example, if you were taking out a $250,000 mortgage and your lender quoted you 3.45 percent in interest, you would be responsible for a one-time mortgage loan insurance premium of $8,625. Residents of Manitoba, Ontario and Quebec pay provincial sales tax on their premium, which represents an additional cost.

Your premium must be paid either as a lump sum up front or in monthly installments, which are added to your mortgage payment. When you add it to your mortgage, it increases your mortgage by the amount of the premium (e.g. $8,625) and you'll pay more interest on your mortgage.

As you can see, the cost of mortgage loan insurance adds to your expense in buying a home. By paying 20 percent up front, you can save money in the long run. If you want to avoid mortgage loan insurance payments, especially in communities like Griesbach, yet cannot afford to pay 20 percent, you have two options: Delay your home purchase and continue to save money or start looking at cheaper homes, where you can afford 20 percent down.

Now that you understand what you're responsible for with a down payment, you can budget for your home, start searching, and become a Canadian home owner.