Of all the steps on the path to owning a home in Ontario, the first major financial milestone is saving for a down payment. It’s a term every prospective homebuyer hears, but its nuances—from minimum requirements to its profound impact on your long-term financial health—are often misunderstood. For anyone dreaming of planting roots in this vibrant province, a deep understanding of the down payment is not just helpful; it’s the essential first chapter in your homeownership story.
What Exactly is a Down Payment?
In the simplest terms, a down payment is the portion of a home’s purchase price that you pay upfront out of your own funds. It is your initial investment in the property. The remaining balance of the purchase price is what you borrow from a lender, such as a bank or credit union, in the form of a mortgage.
For example, if you agree to purchase a home for $600,000 and you have a down payment of $60,000, you are paying for 10% of the home’s value at the outset. You will then need a mortgage for the remaining $540,000. Your down payment demonstrates your financial commitment to the lender and immediately provides you with a stake in your new home.
Minimum Down Payment Requirements in Ontario
In Canada, the minimum down payment required is set by the federal government and is based on a tiered system related to the home’s purchase price. These rules apply uniformly across Ontario.
- For homes with a purchase price up to $500,000: The minimum down payment is 5%.
- For homes with a purchase price between $500,000 and $999,999: The minimum down payment is 5% on the first $500,000 of the purchase price, plus 10% on the portion of the purchase price above $500,000.
- For homes with a purchase price of $1,000,000 or more: The minimum down payment is 20% of the total purchase price.
Let’s look at a few examples to see how this works in practice:
- On a $450,000 condominium: Your minimum down payment would be 5% of $450,000, which is $22,500.
- On a $750,000 townhouse: You would need 5% of the first $500,000 ($25,000) plus 10% of the remaining $250,000 ($25,000). Your total minimum down payment would be $50,000.
- On a $1,200,000 detached home: Since the price is over the $1 million threshold, your minimum down payment is a straight 20% of $1,200,000, which is $240,000.
The 20% Threshold: Avoiding Mortgage Default Insurance
While meeting the minimum is the first goal, the number that aspiring homeowners should really aim for is a 20% down payment. Putting down 20% or more of the purchase price allows you to obtain a “conventional mortgage.” If your down payment is less than 20%, you have what’s known as a “high-ratio mortgage,” and you will be legally required to purchase mortgage default insurance.
This insurance doesn’t protect you, the borrower. It protects the lender in the event that you default on your payments. The premium for this insurance can range from 0.6% to 4.0% of the amount of your mortgage, and it’s typically added to your mortgage principal. This means you’ll be paying interest on your insurance premium over the entire life of the loan, increasing your total borrowing cost. By saving up a 20% down payment, you can avoid this significant extra expense entirely.
Sourcing Your Down Payment Funds
Lenders need to see that your down payment comes from legitimate, non-borrowed sources. Acceptable sources include:
- Personal Savings: Money you’ve saved in a Tax-Free Savings Account (TFSA), a regular savings account, or other investments.
- RRSP (Home Buyers’ Plan): First-time homebuyers in Canada can withdraw up to $60,000 from their Registered Retirement Savings Plan (RRSP) to use towards a down payment, tax-free. You have up to 15 years to repay it.
- A Gift from an Immediate Family Member: A parent or close relative can gift you money for your down payment. The lender will require a signed gift letter stating that the funds are a true gift and not a loan that needs to be repaid.
- Sale of Property: The proceeds from selling a previous home can, of course, be used as a down payment on your next one.
It’s crucial to have a clear paper trail for your down payment funds, as lenders will want to see proof of the money in your account for at least 90 days. This can sometimes be a more detailed process for those who need to get a mortgage if they’re self-employed, as their income and savings documentation can be more complex.
The Powerful Benefits of a Larger Down Payment
Saving more than the minimum isn’t just about avoiding insurance costs; it has several powerful benefits that will improve your financial situation for years to come.
- Lower Monthly Payments: A larger down payment reduces the total amount you need to borrow. A smaller mortgage principal means lower monthly payments, freeing up cash flow for other expenses, investments, or savings, whether you have a fixed-rate mortgage or a variable-rate mortgage.
- Improved Borrowing Terms: Presenting a larger down payment makes you a more attractive, lower-risk borrower. This can lead to a better interest rate from lenders. Your overall financial picture matters, and just as a good credit score can positively affect your mortgage, a substantial down payment signals financial discipline. This also strengthens your ability to pass the mandatory mortgage stress test.
- Instant Home Equity: Your down payment is your starting equity in a home—the portion of the property you truly own. A larger down payment means you own more from day one. This equity is a valuable asset that grows as you pay down your mortgage and as the property value appreciates. Building equity faster can open up future possibilities, like a home equity line of credit (HELOC), should you need it.
Your down payment is the foundation of your future in your new home. By understanding the requirements, the benefits of saving more, and the resources available to you, you can approach this critical step with confidence. It takes discipline and planning, but every dollar you save is a direct investment in your future, paving the way for a successful and sustainable homeownership journey in Ontario.
