This piece was originally published on March 23, 2020, and was updated on September 14, 2022.
It’s a piece of wisdom we’ve heard over and over: it’s best to save at least a 20% down payment when you buy a home. You might’ve heard this repeated by your parents as well-meaning counsel during your homebuying process.
But is it the best advice today, in the era of rapidly rising interest rates and sky-high home prices?
Note: This article is for informative purposes only. Consult a mortgage broker to determine your best mortgage options and a fee-only financial advisor to discuss your overall financial strategy.
Why a 20% down payment?
The adage of putting a 20% down payment on a house or condo is founded on sound financial principles. A 20% down payment offers many economic benefits, including the elimination of mortgage default insurance (often called CMHC insurance), and protection in case the housing market corrects. On the other hand, saving a 20% down payment on a home is a significant financial feat, especially with Canada’s average home price hovering around $630,000 according to the Canadian Real Estate Association. To save a 20% down payment on a home purchase of that size could take years, and a lot can happen with the housing market during that time.
If you’ve just started saving for a home and you’re wondering whether you really need to save for a 20% down payment, here are some other questions to consider.
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How much do you need for a down payment?
First, let’s talk about the law. In Canada, you must pay at least 5% of the home’s purchase price in cash. This percentage is the minimum for homes valued under $500,000, but you are allowed to put down more. For homes priced between $500,000 and $1 million, you’ll need at least 10% of the part of the price above $500,000 in cash. If the home’s purchase price is over $1 million, you’ll need a full 20% deposit.
The minimum legal deposits are easier to understand with examples, which we’ve included in this table.
You’ll also need a full 20% down payment if the home is not your primary residence (such as an investment property).
If you put down between 5% – 20%, your mortgage is considered a high-ratio mortgage, and you’ll need to purchase mortgage default insurance. This insurance protects your lender in case you default on your loan.
The premium for your mortgage default insurance is calculated as a percentage of the home’s purchase price, and that percentage decreases as your down payment increases. Our mortgage down payment calculator can show you how your down payment size affects your mortgage insurance premium. You can pay the premium out of pocket, but most homebuyers opt to add it to their mortgage and pay it off over the life of the loan.
If you put down a 20% down payment or more, your mortgage is considered a conventional mortgage, and you don’t need to purchase mortgage default insurance.
When a 20% down payment makes sense
The most significant barrier to putting down a 20% down payment is access to funds. If you have the money, a 20% down payment makes sense because you’ll pay less interest on your mortgage overall, less mortgage default insurance, and your monthly mortgage payment will be more affordable. Here’s a table illustrating the difference between a 5% down payment and a 20% down payment on a $500,000 home, assuming a 5-year fixed interest rate of 2.29% and 25-year amortization period.
(Source: Ratehub Mortgage Payment Calculator)
As you can see, putting down a larger down payment saves you money in the long run, but for many, it may not be feasible – or even smart.
When to consider a down payment of less than 20%
There are some cases when it doesn’t make sense to save a 20% down payment for your home. For example, in today's rising rate environment, it might be sensible to make your home purchase sooner rather than later. That said, predicting interest rates isn’t an exact science, and jumping into the market before you’re ready brings its own set of risks.
Another time where it might make sense to purchase a home without a 20% down payment is if home prices are rapidly rising in your area. Canada’s housing market has been famously superheated over the last couple of years, with hot markets in across the country posting double-digit gains. Smaller markets aren’t immune to housing pressure either, with far-flung cities like Halifax, Nova Scotia seeing significant price growth as well. Even though the market is starting to cool, prices are still very high.
In this case, the average price of your ideal home in your perfect neighbourhood might be rising so quickly that if you wait to save a 20% down payment, you’ll be priced out. Here, you might only achieve your dream of homeownership if you jump into the market before it’s too late. The drawback of this strategy is that a smaller down payment results in higher costs and leaves you more vulnerable to a housing market correction, which is already occurring. You also have to take the risk that home prices won’t continue to rise.
Opting for a mortgage that is backed by mortgage default insurance also means you’ll have access to a slightly lower interest rate and waived administration fees, which will help offset the interest saved by going with a larger down payment.
Finally, sometimes there are better uses for your money than to invest it into a non-liquid asset. For example, you may receive a better return on your investment if you use your money to invest in your retirement fund, upgrade your education or start a business. Keep in mind that these strategies carry their own set of risks, especially starting a business of your own.
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How to save a 20% down payment
If you’ve decided that saving 20% down is the right choice for your finances, but you need to save more, here are four suggestions on how to reach your goal.
1. Take more time to save
If you’ve been putting money away for your down payment every month, but you haven’t reached your goal yet, consider pushing back your home purchasing plans until you’ve saved more. Go over your budget again to see if you can allocate more cash to your goal and put all windfall cash (such as income tax refunds and raises) towards your down payment.
2. Borrow for your down payment
If you can’t put together a 20% down payment purely from saving the cash, you could borrow money for your down payment. You could ask for a financial gift from family, use a HELOC if you already own a home, or use the Home Buyers’ Plan (HBP), which allows you to withdraw $35,000 from your RRSP, tax-free. Starting in early 2023, you'll also have access to a new savings vehicle called the Tax-Free First Home Savings Account as well.
3. Consider a joint mortgage
If borrowing money isn’t an option, a joint mortgage could be a way to purchase the home that you want. Joint mortgages typically include a third or fourth borrower, usually family members, who co-borrow and co-own the home with you. They will lend their cash to your down payment and own a portion of the property. It’s important to remember that your co-borrowers will have legal title to the home and that you’ll be required to cover the mortgage payment if they default on their payments.
4. Invest elsewhere
Alternatively, if you don’t have a 20% down payment and are unwilling to compromise on this financial goal, it may be more sensible to put your home purchasing plans on hold and focus on building other areas of your net worth. You could invest your money instead and earn a reasonable rate of return. Investing allows you to start saving for your future immediately, and the money remains liquid so that it can be used for a down payment later on, once you are more financially prepared.
The bottom line
Putting 20% down on your first home is an admirable financial achievement that will save you money in the long run. Unfortunately, it’s not an achievable goal for everyone, at least not without significant sacrifice.
If you’ve started saving for a down payment and you aren’t sure whether you should go the distance and put down 20%, speak to a mortgage broker for a free personalized assessment. They’ll tell you how to make use of the money you’ve saved, or if you’re better off waiting and continuing to save.
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