What's the Min Down Payment?

Understanding Down Payments: A Simple Guide for Ontario Residents

Whether you’re looking to buy your first home or your next one, understanding the different types of down payments available to you, is crucial. Let’s explore the various options, with clear examples, to help you make an informed decision.

1. Traditional Down Payment

A traditional down payment is typically 20% of the home's purchase price. This type of down payment can help you avoid the additional cost of mortgage insurance.

Example: If you’re buying a home priced at $500,000, a 20% traditional down payment would be $100,000. By putting down this amount, you avoid mortgage default insurance and could lower your monthly payment.

2. High-Ratio Down Payment

If you cannot afford a 20% down payment, you can still purchase a home with a smaller down payment, but this is considered a high-ratio mortgage. In Canada, the minimum down payment required depends on the home’s purchase price:

• 5% for homes up to $500,000

• 10% for the portion of the home’s price between $500,000 and $999,999

• 20% for homes priced at $1 million or more

High-ratio mortgages require mortgage default insurance, which protects the lender in case you default on the loan.

Example: For a home priced at $600,000, you would need to put down:

• 5% of the first $500,000: $25,000

• 10% of the remaining $100,000: $10,000 Total down payment: $35,000

3. First-Time Home Buyer Incentive

The Canadian government offers a First-Time Home Buyer Incentive, where the government provides 5% or 10% of the home’s purchase price to help first-time buyers. This shared-equity mortgage must be repaid after 25 years or when the home is sold.

Example: If you’re a first-time buyer purchasing a $400,000 home, the government could provide 10% ($40,000) as part of the incentive. You’d only need to come up with your portion of the down payment, reducing the initial cost and ongoing mortgage payments.

4. Home Buyers' Plan (HBP)

The Home Buyers' Plan allows first-time home buyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to put toward a down payment. Couples can withdraw a combined total of $70,000. The withdrawn amount must be repaid within 15 years.

Example: If you have $35,000 in your RRSP, you can withdraw this amount tax-free to use as a down payment on your first home. If you’re buying with a partner, and they also have $35,000 in their RRSP, you can both withdraw, giving you a total of $70,000 for your down payment.

5. Gifted Down Payment

Family members can gift you money for a down payment. Lenders require a letter stating that the money is a gift and not a loan that needs to be repaid. This can be a great option for those who have generous family support.

Example: If your parents decide to gift you $50,000 towards your down payment, this amount can significantly reduce the amount you need to save or borrow, making homeownership more accessible.

6. Equity from an Existing Property

If you already own a home, you can use the equity from your existing property to fund the down payment for your next home. This is often done through a Home Equity Line of Credit (HELOC) or by refinancing your current mortgage.

Example: If your current home is worth $600,000 and you owe $300,000 on your mortgage, you have $300,000 in equity. You can use a portion of this equity as a down payment on a new home.

Conclusion

Understanding the various down payment options available to Ontario residents can make the home buying process smoother and more affordable. Whether you opt for a traditional down payment, take advantage of government incentives, use funds from your RRSP, receive a gift, or leverage equity from an existing property, each option has its benefits. By exploring these avenues, you can find the best strategy to secure your dream home. Happy home hunting!