If your down payment is less than 20%
If your down paymentDown payment The money you put into buying a large item like a car or home.+ read full definition is less than 20% of the purchase price of the home you want to buy, a regular mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition is out of your reach. Do you wait and save more, or buy now and borrow more? If you buy now, you’ll have to get a costlier high-ratio mortgage or a second mortgage.
| Save more and wait to buy | Buy now and borrow more | |
| Interest costs | Pay less interest | Pay more interest |
| Other costs |
Opportunity cost of waiting |
Mortgage insurance
Sales tax added to mortgage insurance cost (*in Ontario for sure, not sure about other provinces) Closing costs including legal fees, appraisal costs and land transfer taxes. |
| Risks | Risk spending what you’ve saved
May have to save even more if house prices rise |
Risk taking on more debt than you can handle which may lead to less financial flexibility during market downturns. |
High-ratio mortgage
A high-ratio mortgage lets you borrow up to 95% of the purchase price. But you’ll have to buy mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC) to cover the higher risk of this loan. You can pay for your insurance in a single lump sum when you buy your home. Or, add it to your mortgage and include it in your monthly payments. If you choose to pay the insurance monthly, you’ll pay interest on it.
Example — Here’s how much you would pay to insure your mortgage with CMHC on a $200,000 home — depending on the amount of your down payment.
| Down payment | Amount of mortgage | Interest rate* | Cost of insurance |
| $30,000 (15%) | $170,000 | 1.80% | $3,060 |
| $20,000 (10%) | $180,000 | 2.40% | $4,320 |
| $10,000 (5%) | $190,000 | 3.60% | $6,840 |
*CMHC loan insurance premiums are current as of June 1, 2015.
New minimum down payment rules
As of February 15, 2016, home buyers will have to abide by new minimum down payment rules. Previously home buyers could have a down payment minimum of 5% for homes under $1 million. The new rules require a minimum 10% down payment for homes over $500,000 – but only on the portion of the price over $500,000. For example:
- Purchase price: $700,000
- 5% minimum down payment on first $500,000: $25,000
- 10% minimum down payment on remaining $200,000: $20,000
- Total minimum down payment on home: $45,000
- Home purchases under $500,000 are not affected by the change and will still require a minimum of 5% down.
Second mortgage
First, you borrow as much as you can with a regular mortgage — also known as a first mortgage.
Then you get a second mortgage for the rest. You get this loan from a different lender. You’ll usually pay a higher rate of interest for a second mortgage. The lenderLender Any person or organization that lends money.+ read full definition is taking a greater risk because it may not get its money back if you have to sell your home. That’s because the lender that holds your first mortgage is first in line.
You may not qualify for the higher debt
When you apply for a mortgage, lenders add up your monthly housing costs and figure out what percentage they are of your gross household monthly income. This figure is called your Gross Debt Service (GDS) ratio. You won’t be considered for a mortgage if your GDS ratio is more than 32%. Learn more about how lenders calculate the GDS ratio.
Caution
The lender can take ownership of your home if you can’t make your mortgage payments.
Key point
The more you borrow, the more it will cost you to buy the same home.