Ask people this question and you will get a variety of answers. Many homeowners will say 10% is what you should put down. However, if you speak with your grandparents, they are likely to suggest that 20% is what you need for a down payment.
The truth is 5% is the minimum down payment that you can make on a home in Canada. If you are planning on buying a $200,000 home then you need $10,000.
It can all be explained by the creation of the Canadian Mortgage and HousiCorporationion (CMHC) by the Canadian government on January 1st, 1946. Before this time, you needed to have 20% down payment to purchase a home. This made home ownership difficult for many Canadians. CMHC was created to ease the homeownership process. This was done by offering mortgage default insurance. This basically guarantees the lender that they will not lose money should you default on your mortgage payments. If you do, CMHC will reimburse your lender up to 100% of the amount borrowed. As a result, lenders will approve your mortgage with a smaller down payment and a lower interest rate.
CMHC charges an insurance premium for this service to cover any losses that may occur from defaulted mortgages. This program was so successful that CMHC lowered the minimum down payment to 5% in the 1980’s.
However, if you have a limited credit history or some previous late payments, they may ask you to provide 10% instead of the traditional 5%. These factors increase the risk that you may default. Increasing your down payment amount helps mitigate that risk.
You should also be aware that the more money you put down, the lower your monthly mortgage payments will be. You can also save thousands in mortgage default insurance premiums by putting 20% down. At this time, homebuyers who put 5% down have to pay a fee of 4% to CMHC or one of the other mortgage default insurers to obtain home financing. On a $400,000 home this is close to $16,000. This fee is capped onto the mortgage amount so that you don’t have to pay the whole thing up front.
If you can provide a 10% down payment the insurance premium falls to 3.10% and if you can provide 20% it drops to zero but the lender will likely charge a slightly higher interest rate. While 20% can seem like an impossible amount to save, you can use a combination of savings, a gift from family and/or a portion of your RRSP savings to achieve this figure. The best recommendation that I can make is to speak with your Dominion Lending Centres mortgage professional to discuss your options and where to start on your home buying adventure.