Buying a home is the biggest purchase most people make over the course of their lives. Typically, people pay for their home through a combination of a lump-sum down payment, and a mortgage (a type of loan) to cover the remainder.
In Canada there are a few ways to save for a down payment. There are also rules covering how big your down payment needs to be, depending on the price of the home.
On this page you’ll find
How does a mortgage work?
Unless you’re able to pay for the whole price of the home you want to buy, you’ll need to borrow the amount not covered by your down payment, A mortgage is the type of loan used to buy a property. Over time you pay back the original amount plus interest. How much interest you pay depends on 3 factors:
- How much you borrow (the principal)
- The interest rate on the loan
- How long you take to pay it back (the amortization period)
You can get a mortgage from banks, credit unions, mortgage companies, insurance companies, trust and loan companies, or mortgage brokers. Shop around and compare interest rates. You also may end up with a better rate if you negotiate with your lender. Learn more about choosing a mortgage that is right for you.
When you get a mortgage from a bank, you must qualify for it. This involves passing a mortgage stress test. It verifies the likelihood you will be able to afford mortgage payments at a qualifying interest rate. You must pass this stress test even if you don’t need mortgage insurance. The stress test considers your anticipated mortgage payments against your anticipated income, expenses and other debt.
Learn more about preparing to get a mortgage from the Financial Consumer Agency of Canada.
How much do you need to save for a down payment?
The amount you need for a down payment depends on a few factors. In Canada, the minimum you need for a down payment depends on the price of the home.
Your minimum down payment must be:
- 5% of the purchase price of the home if it is $500,000 or less.
- 10% if the purchase price is above $500,000 but less than $1 million.
- 20% of the purchase price if it is more than $1 million.
Your lender may require a larger down payment, depending on your credit history or employment status. You’ll also need to factor in the total purchase price and the time horizon you’ll have to pay it back. Consider how long you’ll expect your mortgage term to be. For example, are you likely to be able to pay it back over 25 years or 30 years?
The larger your down payment, the smaller your mortgage will need to be. That means fewer or smaller mortgage payments later on. But the smaller your down payment is, the longer you will need to pay off the mortgage. Be sure you are confident you can handle the mortgage payments.
What else should you know if your down payment is less than 20%?
If your down payment is at least 20% of the purchase price of your home, you can apply for a regular mortgage. But if your down payment is less than 20% — making the mortgage more than 80% of the home’s purchase price — you will need to take on a high-ratio mortgage.
A high-ratio mortgage lets you borrow up to 95% of the purchase price of your home. There are two key differences in how a high-ratio mortgage works compared to other mortgages:
- You will need to purchase mortgage default insurance.
- Your mortgage amortization period cannot be longer than 25 years.
The cost of mortgage default insurance varies depending on the mortgage amount, and on the ratio of the loan to the value of the home — also known as loan-to-value amount or LTV. The higher the LTV, the higher the insurance premium you will pay. Check out this chart from Canadian Mortgage and Housing Corporation (CMHC) showing the insurance premium amounts for different LTVs.
You can pay for your mortgage default insurance in a single lump sum when you buy your home. Or, you can 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. Keep in mind that your interest will compound the longer it takes to pay off the full amount.
Learn more about mortgage insurance from the Canadian Mortgage and Housing Corporation.
Caution
The lender can take ownership of your home if you can’t pay your mortgage payments. Ensure you take on a mortgage you can manage.
What should you know if you’re considering a high ratio mortgage?
If you’re considering a high-ratio mortgage, weigh the pros and cons before making a final decision.
If you wait to save more now and buy later
- Your interest costs might be lower in the future, if you wait to buy.
- You might also have more flexibility to choose a shorter mortgage amortization period, if you don’t have a high-ratio mortgage.
- On the other hand, if home prices rise, you may have to save even more.
- There may also be the opportunity cost of waiting too long to buy.
If you borrow more for a down payment in order to buy now with a high-ratio mortgage:
- You risk taking on more debt than you can handle.
- You may be able to take advantage of an opportunity now if the right home comes available.
- You may pay more interest in the long term due to needing to repay a higher mortgage amount.
- You will need to pay for mortgage insurance, including Ontario sales tax.
What accounts can you use to save for a down payment?
Saving for a down payment on a home can be done in several different ways.
You can save for this large goal using a savings account or non-registered investing account. But your investment earnings or interest earned in these accounts will be considered taxable income. For this reason, it’s a good idea to consider three tax-sheltered accounts available in Canada, that can be used to save for a home.
1. Saving in a Registered Retirement Savings Plan
A Registered Retirement Savings Plan (RRSP) is a type of account that can be used for either investments or savings. Your money is also tax-sheltered while it remains in the account. This makes it a versatile way to save for retirement, because you can grow your money tax-free.
Although RRSPs are designed for retirement savings, the federal government’s Home Buyers’ Plan allows you to borrow up to $60,000 from the RRSP for your home down payment. You won’t pay tax on the money if you pay it back over the next 15 years.
Even if $60,000 can’t cover your entire down payment, a larger down payment will reduce your mortgage payments. And it may give you the room to add extra payments to pay off your mortgage sooner. Learn more about RRSPs.
Caution
With the exception of the Home Buyer’s Plan and the Lifelong Learning Plan, any withdrawals from your RRSP will be considered taxable income. This means you should only withdraw from your RRSP if absolutely necessary, because it will affect how much you owe in taxes that year.
2. Saving in a First Home Savings Account
The First Home Savings account (FHSA) is specifically designed to help Canadians save for a down payment on their first home. It was introduced in 2023. Canadian residents aged 18 years or older can open an FHSA to save towards the purchase of a home in Canada.
The FHSA has a contribution limit of $40,000, and an annual limit of $8,000. Like an RRSP, the FHSA can be used to hold either investments or savings deposits. Also similar to an RRSP, the FHSA allows you to carry forward your contribution room to the next year, if you don’t use it all.
You can also use a FHSA at the same time as the RRSP Home Buyers’ Plan towards the same home purchase. If you end up not using your FHSA for a home purchase, you can transfer your FHSA into an RRSP. Otherwise, any withdrawals will be considered taxable income.
Learn more about how the FHSA works.
3. Saving in a Tax-Free Savings Account
The Tax-Free Savings Account (TFSA) is a versatile type of savings account that can be used for any goal. It’s not limited to retirement or home-buying, but it can be used for either of these purposes and more. The annual contribution limit for TFSAs is the same for all Canadians.
Unlike the RRSP and FHSA, withdrawals from the TFSA are not considered taxable income. But like these accounts, money held in a TFSA grows tax-free while it is in the account. And you can grow your money through savings deposits or investments. Learn more about TFSAs.
When saving for a down payment, you can use either an RRSP Home Buyer’s Plan, FHSA, or TFSA, or even all three at the same time.
Tip
Make it easier to save — consider setting automatic contributions to your savings. To help you save, you can arrange for money to be moved to your savings account each month from your bank account or from your pay. Learn more about ways to make saving easier.
Summary
Buying a home is one of the biggest purchases most people will ever make. Keep these tips in mind:
- You will likely need a combination of a down payment plus a mortgage (unless you can buy the home in one transaction).
- The amount not covered by the down payment is covered by the mortgage.
- A mortgage is a loan you repay over a set number of years (amortization period), with interest.
- Your down payment needs to be at least 5% of the total price of the home.
- If your down payment is less than 20%, it is considered a high-ratio mortgage.
- A high-ratio mortgage requires you to take on mortgage insurance, at additional cost.
- Any mortgage from a bank requires you to pass a stress test in order to qualify for the mortgage.
- You can save for your down payment tax-free using a Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), and/or First Home Savings Account (FHSA).
