The down payment is one of the biggest barriers to homeownership, and while figuring out how much you need is simple math, the options available to you aren’t so black and white.
In this post, we’ll explore how much you need for a down payment for a house in BC, how the process works, when you’ll have to pay mortgage insurance premiums, and how Canada’s mortgage assistance programs can help.
What is a Down Payment
Most of us don’t usually have $500,000 sitting in our savings account to buy a home outright. Luckily, you only need a fraction of that amount, a.k.a. your down payment. Your mortgage loan covers the rest, and then you make monthly payments for the principal balance (how much you owe on the home) and interest (what your lender charges you for borrowing the funds).
If your mortgage lender requires you to make a 10% down payment to get one of their better loan options, you’ll need to come up with $50,000 ($500,000 x 0.10). $50,000 is still a lot, but it’s far less than $500,000 — and there are programs out there that can help!
Before we get to those…
How Much is a Down Payment on a House in BC?
In general, here’s how much you need for your down payment:
Minimum Down Payment %
$0 – $499,999
$500,000 – $999,999
5% for the first $500,000, 10% for the rest
Calculating Your Down Payment
Figuring out how much you need requires simple math. Here’s an example for each price tier:
Example 1: $0 – $499,999
- Kerry wants to buy a one-bedroom home in Surrey for $400,000. Her minimum down payment is 5%, so:
$400,000 x 0.05 = $20,000
Example 2: $50,000 – $999,999
- Remy is looking at a condo in downtown Vancouver for $750,000. He’ll need 5% for the first $500,000 and 10% for the last $250,000. Here’s how much he’ll need altogether:
$500,000 x 0.05 = $25,000
$250,000 x 0.10 = $25,000
$25,000 + $25,000 = $50,000
Example 3: $1,000,000+
- Jin and Melissa have their eye on a 3-bedroom home with a lot of land in White Rock for $1,500,000. For their down payment, they’ll need:
$1,500,000 x 0.20 = $300,000
As you can see, the more expensive your home, the more substantial the down payment. Also, be mindful that these are the minimum requirements. Mortgage lenders may require you to make a larger down payment, depending on their rules and your situation, like if you’re self-employed or have a low credit score.
How Does the Down Payment Process Work?
Your down payment is due when you sign the closing documents and complete your real estate transaction. However, you’ll likely end up paying it in two different portions: your earnest money deposit and down payment.
If you want to show the seller that you’re serious about buying their property, stand out from the crowd with an earnest money deposit. An earnest money deposit is a sum of money (usually between 3% – 5%) that you offer the seller and hold in an escrow account that’s managed by a third party, usually a real estate agent or attorney.
Suppose you withdraw from the offer without a valid reason or fail to meet specific contingencies outlined in your purchase agreement. In that case, the seller may be entitled to keep the earnest money as compensation for their time and for taking their home off the market. If the real estate transaction is completed, your earnest money deposit goes toward your down payment.
For example, if Kerry wants her $400,000 offer for that Surrey one-bedroom to stand out, she can make an earnest money deposit of 3%, or $12,000. Later, when the deal closes, she’ll need to pay the additional 2%, or $8,000, to reach her minimum required down payment of 5%, or $20,000.
Why Your Down Payment Amount Matters
Obviously, the less you put down, the more you’ll owe later. Play around with our mortgage calculator to see how much you’ll owe.
However, your down payment amount probably affects more than you’d think:
How Much Home You Can Afford
When it comes to getting a loan, your down payment is just one piece of the puzzle. Lenders look for several things when determining if you qualify for a loan and what kinds:
- Credit history and score
- Debt-to-income ratio
- Income level
- If you’re salaried or self-employed
- How long you’ve been at your current job
- Additional funds and sources of income
If you’re making the minimum down payment, lenders may look at your background with added scrutiny, while larger down payments can provide a little leeway.
Paying Premium Mortgage Insurance (PMI)
If you put less than 20% down, you’ll be required to pay PMI because your loan is considered a “high ratio” mortgage. In other words, your lender is taking on added risk by loaning you the money you need to buy your home. Mortgage insurance premiums usually range between 0.6% and 4.50% of your mortgage amount and can be paid in full during closing or added to your monthly mortgage payments.
There are three premium mortgage insurers in Canada:
Once you have between 20% – 22% equity in your home, you can contact your lender about dropping PMI.
What Are Mortgage Assistance Programs and How Do They Work?
Mortgage assistance programs help buyers come up with enough money for their down payments — and there are two that are really worth talking about:
- First-Time Home Buyer Incentive (FTHBI)
- Home Buyer’s Plan
FTHBI is a shared equity mortgage, where the federal government loans you a portion of your first home’s down payment. Typically, the incentive is for 5% of your down payment, but if you’re purchasing a newly-constructed home, it can be for 10%.
To qualify for FTHBI, you must be a first-time home buyer and need to have at least 5% of your down payment already saved. You also must be a Canadian citizen, a permanent resident, or a non-permanent resident who is legally authorized to work in Canada and need to meet the income and home price requirements.
The extra 5% – 10% down can save you hundreds on your monthly mortgage payments. However, because it’s a shared equity mortgage, you’ll be required to pay back the percentage that the federal government loaned you either 1. when your loan is paid off or 2. when you sell. Since your home is likely to increase in value, that percentage is usually higher than what was loaned to you in the first place.
Is this worth it? Just ask!
Home Buyer’s Plan
The Home Buyer’s Plan lets you withdraw up to $25,000 from your Registered Retirement Savings Plan (RRSP). This money is tax-free, and you can use it to buy or build a qualifying home.
If you decide to do this, please note that the government requires you to repay what you withdrew into your RRSP within 15 years to avoid paying taxes on it. If you’re great with a budget, you should be able to pay back into your RRSP without issue. However, we recommend going over your options before committing to this.
Unfortunately, no mortgage assistance program just gifts you money. However, if you receive a financial gift from a loved one, lenders usually accept it as part of your down payment. They’ll likely be required to sign something confirming that it’s a gift, not a loan.
Figuring out how much of a down payment you need for your home is a crucial step in the home-buying process. If you have more than the minimum required, you must determine how much you should put down based on your financial needs and goals, and what’s best for one person may not be what’s best for you.
And when you’re ready, your realtor in Vancouver Kim Lee is here to help you get the home of your dreams!