Mortgage Blog

Minimum Down Payment Required for Mortgage Approval in 2022

March 31, 2022 | Posted by: Ronice Harrison

Understanding the ins and outs of down payments in Canada is one of the keys to smooth and successful mortgage approval. 

In this article, we will look at the most important things that you need to know about the minimum down payment required for mortgage approval in 2022. This way, you can plan properly and face no surprises before closing.

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We will cover:

  • How the minimum down payment works.

  • The different kinds of minimum down payments.

  • How a down payment works, with CMHC or mortgage default insurance in the picture.

  • How a down payment influences the mortgage rate.

  • The benefits of a 20% down payment

How the minimum down payment works

No matter if you are a first-time buyer, or are upgrading your home, the minimum down payment in Ontario and across Canada is 5% of the first $500,000 of the home purchase price. In other words, the down payment on a $500,000 home would be $25,000.

However, on any purchase price over and above $500,000, the minimum down payment is 10%. So for example:

If you want to buy a $750,000 home, your down payment would be $25,000 on the first $500,000 of the purchase price, and then $25,000 on the next $250,000 of the purchase price (for a total of $50,000).

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The different kinds of minimum down payment

The following is a shortlist of the different down payment minimums in the market, based on different purchase types.

  • Buying your primary residence: 5% on the first $500,000, 10% on above $500,000 – total the two to arrive at the minimum. However, with this minimum, you will be subject to CMHC insurance.

  • Avoiding the CMHC insurance: 20% down payment is the minimum to avoid CMHC insurance (as much as 4% of the purchase price if your down payment is under 20%).

  • Buying an investment property: For most lenders, 20% is the minimum down payment for investment properties.

  • Buying a second home or cabin: A second home for recreation, family, or other purposes can be bought with as little as a 5% down payment, the same as a primary residence. However, 20% down is still required to avoid CMHC insurance fees.

How your down payment influences your mortgage rate

A big surprise for many is that the mortgage rates can change depending on your down payment. In fact, a down payment is probably the biggest factor in determining your rate. 

Here are the main categories of down payment and how they affect your mortgage interest rate:

Less than 20% down payment

This is a CMHC, or ‘high ratio’ insured mortgage. Because the lender is protected against borrower default, the lender has little to no risk in lending you money.

Therefore, they can offer some of their best mortgage rates to borrowers with this low down payment. Most of the rates you see advertised online are CMHC insured or high ratio mortgage rates.

20% Down payment

At a 20% down payment, the lender is no longer protected by the CMHC from default and is therefore exposed to default risk. Because it is the lowest/ minimum down payment in this regard, it is also the most risk a lender can assume. 

Therefore rates are typically slightly higher at the 20% mark.

25%+ Down Payment

As your down payment increases, lender risk decreases, and rates begin to fall accordingly towards the levels seen with the ‘high ratio’ rates. 

For some lenders, a 25% down payment gets you very close to their lowest rate. For others, as much as 35% down payment is needed to obtain a lower interest rate.

The benefits of a 20% down payment

If you can get to a 20% down payment, you are still better off than with a smaller down payment. Even though your rate would be higher, your cost of borrowing would be lower.

Paying a slightly higher interest rate will still cost you less than the 3% – 4% CMHC default insurance premium.

The savings, in most cases, are easily in the thousands of dollars, with a 20% down payment Vs. a lower rate CMHC insured mortgage.

Also at a 20% down payment, the 30-year amortization becomes available. With less than a 20% down payment, a 30-year amortization is not available. A 30-year amortization in and of itself can have the benefit of increasing your purchase price if this is something you are looking for.

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Professional Mortgage Advice

Canadian mortgage requirements change often. Residency, citizenship, income, credit score, the type of real estate you want to buy, and many other factors affect the minimum down payment requirements. 

Therefore, we recommend discussing your situation and needs with a mortgage professional like the expert mortgage brokers at AQRE Lending.

To get started, fill out our 1-minute application form and learn how much you could borrow today!

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