The Real Cost of a 10% vs. 20% Down Payment in Canada

Choosing 10% over 20% down adds CMHC premiums and higher interest costs — but the opportunity cost of the saved cash deposit may make 10% the smarter financial move. When buying a home in Canada, one of the most significant decisions you'll face is determining your down payment. The size of your down payment can greatly influence your mortgage terms, monthly payments, and overall financial strategy.

Understanding Down Payment Requirements in Canada

The minimum down payment required in Canada depends on the purchase price of the home. For homes priced up to $500,000, the minimum down payment is 5%. For homes between $500,001 and $999,999, you need 5% for the first $500,000 and 10% for the remaining amount. For homes priced at $1 million or more, a minimum down payment of 20% is required. This can be especially relevant when considering Investment Property Financing in Canada

CMHC Premiums and Insurance

When you put less than 20% down, your mortgage must be insured by the Canada Mortgage and Housing Corporation (CMHC) or a private insurer. This insurance protects the lender in case of default but comes at a cost to the borrower. The CMHC premium is added to your mortgage and paid over time.

Interest Costs and Amortization

A smaller down payment means a larger mortgage, which results in higher interest costs over the life of the loan. For example, on a $500,000 home, a 10% down payment means a mortgage of $450,000, while a 20% down payment reduces it to $400,000.

Additionally, with a smaller down payment, you may face a longer amortization period, which can increase the total interest paid. However, with a larger down payment, you might qualify for better mortgage rates and terms.

Opportunity Cost of a Larger Down Payment

Saving for a 20% down payment can take years, during which that money could be invested or used for other financial goals. The opportunity cost of tying up your funds in a larger down payment should be considered. For instance, investing the difference could yield returns that outweigh the additional interest and CMHC premiums.

Impact on Monthly Payments

A larger down payment will reduce your monthly mortgage payments. However, the difference might be less than you expect. For example, on a $500,000 home with a 10% down payment at a 4.19% fixed rate over 25 years, your monthly payment would be approximately $2,370. With a 20% down payment, it would be around $2,060—a difference of about $310 per month.

Qualifying for a Mortgage

Putting down less than 20% can make it harder to qualify for a mortgage due to the OSFI stress test. Lenders must ensure you can afford your payments at a higher qualifying rate, which is currently the greater of your contract rate plus 2% or 5.25%. A larger down payment can improve your debt-to-income ratio and make it easier to pass the stress test.

Long-Term Financial Goals

Your choice between a 10% and 20% down payment should align with your long-term financial goals. If you plan to stay in the home for many years, a larger down payment can save you money on interest over time. However, if you anticipate moving or refinancing within a few years, a smaller down payment might be more advantageous.

Bottom Line

The decision between a 10% and 20% down payment in Canada involves weighing several factors, including CMHC premiums, interest costs, opportunity cost, monthly payments, mortgage qualification, and long-term financial goals. Here are some key takeaways:

1. Evaluate the total cost of a smaller down payment, including CMHC premiums and higher interest.
2. Consider the opportunity cost of tying up funds in a larger down payment.
3. Assess how a larger down payment affects your monthly payments and mortgage qualification.
4. Align your decision with your long-term financial goals and plans for the property.

Ultimately, the best choice depends on your individual circumstances. Consulting with a licensed mortgage broker can help you make an informed decision tailored to your unique situation.