Down Payment on a House

Whenever you buy a home, a down payment is required (by law) in order to close the deal. A down payment is the total amount of money that you pay upfront when you purchase a home. The purpose of a down payment is to protect the mortgage lender in case the person borrowing the money defaults on the loan. This reduces their risk as the loan will more likely be recovered if a default does occur and the house is sold.

The minimum down payment required in Canada is 5% of the purchase price. For example, if the total purchase price of your new home is $300,000, your required down payment would be $15,000. This 5% is just the minimum though, and so you can put down as much as you feel comfortable with after meeting this number. This amount is then taken off of the total purchase price amount, meaning that your monthly mortgage payments decrease if the amount of your down payment increases. Another benefit to a larger down payment is that your CMHC insurance premium decreases with a higher down payment.

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Another option for your down payment (if you do not have RRSPs or family with the means to gift you the money) is to seek out a zero down payment mortgage. This means that your down payment is included in the mortgage. However, in order to qualify for a zero down payment mortgage your credit must be pristine. These types of mortgages are often accompanied by a much higher interest rate, so shouldn’t be a first choice if avoidable.