Buying With Less Than 20% Down

You do not need 20% down to buy a home in Canada. Most first-time buyers get in with far less, using mortgage default insurance to bridge the gap. Here is how it works and what it costs.

The minimum down payment

The minimum is tiered by purchase price:

| Purchase price | Minimum down payment | | --- | --- | | Up to $500,000 | 5% | | $500,000 to $1,500,000 | 5% on the first $500,000, 10% on the rest | | Over $1,500,000 | 20%, and default insurance is not available |

On a $400,000 home the minimum is $20,000. On a $700,000 home it is $25,000 on the first $500,000 plus $20,000 on the next $200,000, for $45,000.

What default insurance is

When you put down less than 20%, the lender requires mortgage default insurance (from CMHC, Sagen, or Canada Guaranty). It protects the lender if you default; it does not protect you. It is what allows lenders to offer low-down-payment mortgages at competitive rates.

The premium is a percentage of the mortgage amount, based on your loan-to-value:

| Down payment | Premium | | --- | --- | | 5% to 9.99% | 4.00% | | 10% to 14.99% | 3.10% | | 15% to 19.99% | 2.80% |

A 30-year amortization adds 0.20%. The premium is added to your mortgage balance and paid off over the amortization — but the provincial sales tax on the premium cannot be added and is due in cash at closing. In Saskatchewan that is 6% of the premium.

The trade-off

An insured mortgage often carries a lower interest rate than an uninsured one, because the lender's risk is covered. So a buyer with 10% down can sometimes get a better rate than a buyer with 20% down — the premium is the cost of that.

The math usually favours buying sooner with less down rather than waiting years to save 20%, especially when prices and rents are rising. But run it both ways.

Programs that help

• The Home Buyers' Plan lets each first-time buyer withdraw up to $60,000 from an RRSP tax-free toward a down payment, repaid over 15 years.
• The First Home Savings Account (FHSA) allows up to $8,000 a year (to a $40,000 lifetime maximum) in deductible contributions that come out tax-free for a home purchase.
• The GST New Housing Rebate applies to newly built homes and can be credited by the builder at closing.

With 5% down, the deal is real but the margins are thin. I will make sure the closing-cost cash, the premium PST, and the payment all work before you write an offer — not after.