Very rarely do people have the cash to buy a house in full. Most borrowers must put money down on a home to purchase it, known as a down payment. Lenders make up the difference with a mortgage loan, using your new home as security until your mortgage is paid off. Many borrowers qualify to put down less than 20% on a home but must pay mortgage insurance.

When you put more than 20% down, this insurance is not mandatory. Understanding how mortgage insurance works and whether you should make a 20% down payment is very important when buying a home.

How Much Must you Put Down?

All borrowers have a minimum amount they must put down on a home. You are always free to make a larger down payment but must meet the minimum to qualify. The minimums are as follows:

· Sales price $500,000 or less = 5% down payment
· Sales price $500,000 – $999,999 = 5% down on the first $500,000
and then 10% on any amount over $500,000
· Sales price of $1 million or more – 20% down payment

Keep in mind that just because you have the minimum down payment, doesn’t always mean you qualify. There are many other factors that lenders consider, such as your income, employment history, savings, debts, credit score & history, and much more.

Paying Mortgage Insurance

You’ll pay mortgage insurance if you don’t put down at least 20% on a home. This insurance protects the lender should you stop making your payments. However, you are responsible for the premiums, and lenders can require mortgage insurance even with a 20% down payment if you have bad credit or are self-employed because you are still a high risk of default. This insurance gets added to your mortgage and isn’t required to pay out of pocket. Here is a great calculator by CMHC to determine your potential premiums and mortgage payment: CLICK HERE

There are three companies that provide this insurance to Canadians, CMHC, Canada Guaranty and Sagen. They all offer the same premiums but some have different programs & policies.

How a Down Payment Affects your Mortgage Payment

The more money you put down on a home, the lower your mortgage payment will be because you borrow less to buy the house.

In addition, the more money you put down, the less you’ll pay in mortgage insurance because you have more invested in the home. So if you can meet the 20% down payment requirement, you’ll have the lowest mortgage payment because you won’t pay mortgage insurance (in most cases).

Homebuyer Assistance Programs

If you don’t have 20% to put down, or enough to qualify for a mortgage, there are a couple of plans that may help.

Homebuyer’s Plan (HBP)

The Homebuyer’s Plan allows up to a $35,000 withdrawal from your Registered Retirement Savings Plan. In addition, you won’t pay taxes on the amount you withdraw as long as you repay the amount within 15 years.

Before withdrawing from your RRSP, make sure it won’t affect your long-term retirement plans, especially if you’re nearing retirement.

First-Time Homebuyer Incentive

If you’re a first-time homebuyer, you may be eligible for a shared equity mortgage with the Canada Government.

This financing is interest-free and has a 25-year repayment period. However, you can prepay it at any time and must repay if you sell the house before paying the loan in full.