A down payment is one of the fundamental concepts of mortgages. It is a part of the total house price, and you have to pay it upfront when you buy a home. The remaining amount is covered by the mortgage loan. Cash is usually the preferred payment method.

Generally, down payments are given as a percentage of the total price of the house.

Minimum Down Payments in Canada

The minimum required value for a down payment in Canada is 5% of the house price. However, if the house costs more than $1 million, then you will have to pay a down payment equal to at least 20%.

A down payment between 5% and 20% is the norm, but it still should not be the preferred range. A mortgage with a down payment less than 20% is termed a high ratio mortgage. All other mortgages with down payments equal to or more than 20% are conventional mortgages.

You should try to accumulate enough funds so that you can pay a down payment of at least 20%. If you pay any value which is less than this, you will have to purchase default mortgage insurance or the CMHC insurance. This is a mandatory clause set by the government.

The CMHC insurance will provide coverage to the lender if you are unable to pay the total loaned amount in the future.

Factors Which Are Affected by the Size of Down Payments

The down payment is a significant part of all mortgages because it greatly affects three other important factors.

• The total home price
• Mortgage size: monthly payments and rate
• CMHC insurance

The Total Home Price

Since you must pay a down payment of at least 5% for a house in Canada, you can use this to evaluate the total house price which you can afford. If you can pay a large enough down payment, then you can purchase an expensive house, otherwise you will just have to go for a more affordable option.

Mortgage Size

The monthly payments and mortgage rates are highly dependent on the down payment. The more you can pay upfront, the lesser your monthly payments will be. Same goes for the interest rate. A large down payment considerably reduces the rates.

CMHC Insurance

The premium of default mortgage insurance is inversely proportional to the size of the down payments. The larger your down payment, the lesser your insurance. As stated previously, a down payment of 20% does not require insurance anymore.