What is a down payment? Are there nuances in Canada?

Almost every country requires a down payment on a home loan. In Canada, there are variable mortgage options that suggest different possible amounts for the down payment.

It’s obvious that if you want to buy a house, you’ll have to make a down payment. And, of course, you have wondered what is a down payment and what benefit it has to you or the lender.

You know that prices on real estate in Canada are usually very high, and the required down payment can be a substantial sum, prohibitive for most citizens. You also know that banks and other financial institutions in Canada have created various loan options with different down payment requirements to solve this problem.

But before you take a closer look at the loan options available, stop asking yourself the question, “What is a down payment?” and learn a little about what it is and how it should be handled. After learning the theory, you may find it easier to take a closer look at the options offered and choose one with the most favorable terms for you.

What is a down payment?

An initial contribution is an amount you must make before you buy a house. You cannot include the required amount in the total of the future mortgage; it is two separate payments. if you need to really know what is a down payment — understanding “this part” is crucial.

For example, you decide to buy a house the worth of which is $500,000. With the amount of your savings, you can make an initial deposit of $50,000, for example, or 10 percent. The amount of your principal mortgage would be $450,000. If you were to make a down payment of $100,000, your down payment would be 22% of the purchase price. In this case, the balance of your mortgage would be $350,000.

Lenders refer to the percentage of the total price of the purchased property they are providing money as the loan-to-value ratio (LTV). Here is an example:

  • If you put down $50,000 (10 percent) on a home worth $500,000, your LTV is 90 percent.
  • If you put down $200,000 (15 percent) on a home worth $500,000, your LTV is 85 percent.

This number is very important because lenders use it to quote the highest possible loan they can give you.

The higher your initial deposit, the easier it is for you to get a mortgage. In addition, having a larger down payment can lower the cost of your future regular payments.

It is also important to note that a large initial contribution can improve your situation if you do not have an adequate credit score. Accordingly, a higher credit score may work in your favor if you cannot make a large down payment.

With property prices so high, initial financing is a challenge for many people, especially the younger generation looking to purchase a property for the first time. Therefore, loans that allow for small down payments are popular among the general population. However, the disadvantage of such a loan is the payment of insurance, which is not cheap. Typically, moneylenders who don’t desire to take unnecessary risks require default insurance if your initial deposit is less than twenty percent.

Putting those numbers on the scale, it’s hard to say that paying extra money for the required insurance could be a bad option. First, you are increasing the value of your home with the premiums, and second, you can imagine how many years of money you would have to set aside to save an amount equal to the required 20% down payment.

Why is the initial deposit required?

The reason lenders require a down payment is simple: it protects them from emergencies such as a borrower’s default or the sudden decision by someone who has bought a house to sell it for less than the remaining balance on the mortgage.

Ways to save for a down payment

For people planning to purchase a property for the second time, it is easier to make an initial contribution – they already have equity in their first house. The plan is easy: sell the first house and use saved funds to make the initial deposit for the second one.

For those purchasing residence for the first time in life, there are several ways to raise money for an initial down payment:

  • Save money for an uncertain period of time, usually a long one
  •  Sell your personal assets, such as cars or real estate
  • Borrow from a relative or close friend without having to pay interest
  • Government programs to help with the down payment

Under the rules, gifts of money from anyone who might take advantage of the transaction being made, such as a seller or a real estate broker, are prohibited.

What is the minimum possible amount of the down payment?

It depends on the type of mortgage. For jumbo mortgages, some lenders require a minimum initial contribution of 25% or even 30% due to the higher risk involved. With high-ratio mortgages, you can purchase a property with as little as a 5% down payment.

Other conditions that affect the amount of the down payment are the type of property you want to buy or the home’s overall price.

Mortgage default insurance

One of the requirements of most lenders, if you make an initial contribution of less than 20%, is to purchase insurance. It serves as a safeguard for lenders if you cannot regularize your expenses and stop making monthly contributions.

The sum you have to pay for the insurance also depends on the amount of your initial contribution. The higher your first deposit, the lower your insurance premium will be. Generally, you have two options for paying for insurance: Either you pay it all at once, or you add it to the amount of the main mortgage.

Make a large down payment – is it worth it?

A large down payment can be advantageous in some ways – but it is not always a wise decision. You should consider the following things:

  • Using all of your savings, including your rainy-day reserves, to increase the amount of the down payment. What would you do then in case of an emergency?
  • You should think twice if you have other debts with high-interest rates. It’s probably better to take care of your debt first.
  • Putting money aside for a long period of your life is also a big mistake. Property prices tend to increase every year, while the value of money does not change for sure as well.


The amount of down payment that you should make is always a delicate question. On the one hand, large down payments bring several advantages, the chief of which is that the total amount of the loan and the interest portion of the mortgage are less. On the other hand, it is not always easy to come up with a large amount at once. It is good to know that there are a variety of loan offers that allow down payments at favorable conditions.

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