How Much Should You Put Toward a Down Payment?

Buying a first home is overwhelming, and the down payment can be the most intimidating part. Figuring out exactly how much you’ll need in order to enter the market will help you set a goal to save for, and understand exactly how much you’ll need before you can even start looking.

What is it?
A down payment is the minimum amount of money you are required to put down on your home. Since homes are too expensive for most people to purchase outright, the bank is willing to lend out the money so people can become homeowners—this is what a mortgage is. Before they will give it to you though, you have to invest in the home upfront. In Canada, the minimum amount for a down payment is five per cent of the value of the home you are purchasing.

How much do I need?
Many people put their entire savings into their down payment—but this is not a wise move. If the market crashes or you come into an unexpected expense, having no savings will become a major issue. Since owning a home comes with many unexpected expenses you will be responsible for, you’ll need money available for these repairs. While you’ll need to put down at least five per cent, putting in 20 per cent upfront (if you can do so and still have some savings left over) has its financial advantages.

What about insurance?
If you are putting down less than 20 per cent, you will have to pay for the Canadian and Mortgage Housing Corporation (CMHC) insurance, which protects the bank if you are suddenly unable to make your mortgage payment. The premium depends on how much you put down. If paying less than 10 per cent upfront, it’s a 4 per cent premium on the value of your home. If paying less than 15 per cent, it’s 3.1 per cent, and if paying less than 20 per cent, it’s 2.8. This will eat away at your equity fast if you’re not careful, which is why many choose to wait until they can afford to put 20 per cent down.

Is borrowing for a down payment feasible?
While this might seem like an easier way to get into an expensive market faster, it’s not a great idea. If you must borrow, do so from parents or family who are willing to help you. If you borrow for your down payment, you’ll have monthly payments on both your mortgage and the loan, and this will mean a substantial amount of your income is going to debt each month, leaving you house poor.