What is a down payment?

Amortization, collateral mortgages, appraisals — if you’re a first-time homebuyer, it might feel like you’re learning a whole new language. And while you’re probably familiar with the term “down payment,” it’s still important to fully understand the details and how it will impact your home-buying journey, now and down the road.

Here are some common questions about down payments on a property, key factors to consider when deciding how much to put down, and some smart strategies to make the most of your savings.

First, what exactly is a down payment?

A down payment on property is a lump sum of money that you pay upfront when buying a home. It typically comes from your own savings and can be as low as 5% of your home purchase price if the overall total is under $1 million.

The total amount of your down payment will be deducted from the total purchase price of your home. The remaining total of the home purchase price will be covered by your mortgage. 

For example, if your purchase price is $350,000 and you pay $50,000 as a down payment, your mortgage loan covers the remaining $300,000 of the purchase price. You’ll pay that amount back over time to your mortgage lender, plus interest.

The amount you pay as a down payment is important because it will affect your total mortgage amount — which also affects how much you pay in interest over the life of your loan.

A larger down payment will reduce the amount you have to borrow from your lender. That means a lower loan amount, which in turn means you’ll have lower regular payments and lower interest payments. A higher one can also help you avoid mortgage loan insurance, which makes your monthly payments higher (more on that later). 

You might have also heard people talk about a deposit when buying a home. But what is the difference between a down payment and deposit? While these terms seem similar, there are actually some important differences in the home buying world.

A deposit is a sum of money you pay upfront after your offer is accepted. This early payment can help show the home’s sellers that you’re serious about your offer and intend to follow through on the deal.

On the other hand, your down payment is paid on closing day and isn’t used as a negotiating tactic with the seller. The deposit is considered to be part of the total down payment.

Don’t worry — it’s possible to get your deposit back in certain circumstances, like if the seller recuses their acceptance of your offer. Talk to your realtor about adding conditions to your sales agreement to help protect your deposit.

How much do you need for a down payment?

One of the top questions on many aspiring homebuyers minds — how much do I actually need for a down payment? Understanding how much a down payment costs can help you set accurate savings goals and find properties within your budget when the time comes.

While you’ve probably heard some percentages thrown around, there is no magic number when it comes to a down payment. The exact total you’ll need will depend on a lot of factors, including your home purchase price, the type of property you’re buying, and more. Let’s dive into the most common factors that impact your down payment amount.

What is the minimum amount required for a down payment?

Your down payment will always be a certain percentage of your home purchase price, typically between 5% and 20%. However, there is no maximum down payment amount — it can be as large as you want it to be.

We know, that seems like a pretty big range. You can get a little closer to what your minimum down payment will be if you know your home’s estimated purchase price.

What about mortgage default insurance?

One important thing to keep in mind when making your down payment — even if you meet the minimum down payment, you still might have to pay mortgage default insurance.

• What is mortgage default insurance? Also called mortgage loan insurance, it’s a type of insurance that protects your lender in case you can’t make your mortgage payments.
• When do I need to pay mortgage default insurance? You’ll typically need it when your down payment is less than 20% of your purchase price.
• So how much does mortgage default insurance cost you? The fee you pay, called a premium, generally ranges from 0.6% to 4.5% of your mortgage amount. The exact number will depend on your down payment total.

Your lender will typically coordinate getting mortgage default insurance on your behalf. You’ll then get two options for how you want to pay:

1. You can pay your mortgage default insurance as a lump sum up front.
2. You can add your premium to your total mortgage amount. In this case, you’ll need to pay interest on your premium.

One last thing to remember is that some provinces, including Ontario, Manitoba, and Quebec, apply local sales tax to mortgage loan insurance premiums. Your lender will be able to tell you more details about your specific situation.

What are the pros and cons of a bigger down payment?

While there are the minimum down payment amounts required to buy a home, you can still put down more than the minimum. Here are some things to consider when deciding how much to put down on a house:

Advantages of a larger down payment:

• If you put down 20% or more, you’ll avoid having to pay mortgage loan insurance. This can help you do away with pesky premiums that make your payments more expensive, potentially saving you money in the long run.
• The higher your down payment, the less money you need to borrow from your mortgage lender. And a lower mortgage total means lower monthly payments.
• Another perk of a smaller mortgage is less interest. A bigger down payment will reduce your monthly interest payments and the total interest paid over the life of your loan.
• If you pay more up front, you’ll have more equity in your home. This can come in handy if you need to take out a home equity loan or homeowner’s line of credit.

Disadvantages of a large down payment:

• If you put all your money toward a down payment, you’ll have less accessible cash available. That means you’ll have less funds for moving, making renovations, buying furniture, and other costs associated with a new home.
• Along with a lack of funds for new homeowner activities, the money you put toward your down payment are funds that could be going toward your retirement savings, investments, and other long-term planning.
• A larger down payment can take longer to save for, which can delay your homebuying timeline.

One potential risk of a smaller down payment is the potential for negative equity, also known as being “underwater” on your mortgage. This happens when the value of your home is worth less than the outstanding amount you owe, like when home prices drop. Unfortunately, this can happen regardless of your situation, but a lower down payment can put you at a higher risk.

How does the down payment amount affect the total cost of your mortgage?

Want to see the impact a larger down payment can make on your payments? Let’s crunch the numbers. In this scenario, say you’re buying a $300,000 home at a 5% interest rate. This is on a 2-year term with a 25-year amortization.

If you want to see how your down payment effects your monthly payments, try it for yourself with our mortgage calculator.