You Don't Need 20% Down for a Purchase: A Complete Guide to Low Down Payment Options in Ontario

Note: For clarity, in this article, we refer to "mortgage broker" as a general term that encompasses all mortgage professionals, including licensed mortgage brokers, Level 1 agents, and Level 2 agents.

Introduction

One of the biggest myths in Canadian real estate is that you need a 20% down payment to buy a home. This misconception has prevented countless potential homeowners from taking the leap into homeownership, believing they need to save for years or even decades before they can afford their first home.

The truth is, in Ontario and across Canada, you can purchase a home with as little as 5% down. Understanding your down payment options and how mortgage default insurance works can be the key to unlocking homeownership much sooner than you think.

This is where working with a dual-licensed mortgage broker and realtor becomes invaluable. They can navigate both the financing and property selection aspects of your purchase, ensuring you make informed decisions about down payment strategies that align with your financial goals and market opportunities.

Understanding Down Payment Requirements in Canada

In Canada, the minimum down payment required depends on the purchase price of the home. The rules are straightforward but often misunderstood:

For most first-time homebuyers in Ontario, this means you can enter the market with significantly less cash than the traditional 20% down payment. Let's break down what this looks like in real numbers:

What is Mortgage Default Insurance (CMHC Insurance)?

When you put down less than 20%, your mortgage is considered "high-ratio" and requires mortgage default insurance. This insurance protects the lender in case you default on your mortgage payments. In Canada, this insurance is provided by three main insurers:

• Canada Mortgage and Housing Corporation (CMHC) - Government-backed
• Sagen (formerly Genworth Financial) - Private insurer
• Canada Guaranty - Private insurer

How Much Does Mortgage Default Insurance Cost?

The cost of mortgage default insurance is calculated as a percentage of your mortgage amount and depends on your down payment size:

This premium can be paid upfront or added to your mortgage amount and paid over the life of your loan. Most buyers choose to add it to their mortgage, spreading the cost over 25-30 years. Important: As of 2024, mortgage default insurance is required for all high-ratio mortgages and cannot be avoided with alternative lending products.

Benefits of Low Down Payment Purchases

While putting down 20% eliminates the need for mortgage default insurance, there are several compelling reasons why a lower down payment might be the right strategy:

1. Enter the Market Sooner

Real estate appreciation often outpaces the ability to save for a larger down payment. By entering the market with 5-10% down, you can start building equity immediately rather than watching home prices potentially rise while you save.

2. Preserve Cash for Other Investments

If you have investment opportunities that could yield higher returns than your mortgage interest rate, it may make financial sense to invest that extra cash rather than tie it up in your home's down payment.

3. Maintain Emergency Fund

Homeownership comes with unexpected expenses. Keeping more cash available for emergencies, renovations, or home improvements can provide valuable financial flexibility.

4. Take Advantage of First-Time Buyer Programs

Many first-time buyer programs and incentives are designed specifically for purchases with lower down payments, providing additional support for your homeownership journey. The new First Home Savings Account (FHSA) launched in 2023 provides significant tax advantages for first-time buyers.

First-Time Homebuyer Programs and Incentives

Ontario and federal programs offer several incentives that can make low down payment purchases even more attractive:

Home Buyers' Plan (HBP)

The HBP allows first-time homebuyers to withdraw up to $60,000 from their RRSP for a down payment, tax-free (increased from $35,000 in 2022). You have 15 years to repay this amount to your RRSP. If you're buying with a spouse or partner, you can each withdraw up to $60,000 for a combined total of $120,000.

First Home Savings Account (FHSA)

Launched in 2023, the FHSA allows first-time homebuyers to contribute up to $8,000 annually (lifetime maximum of $40,000) with tax-deductible contributions and tax-free withdrawals for home purchases. This combines the best features of RRSPs and TFSAs specifically for homebuying.

First-Time Home Buyer Incentive (FTHBI)

Note: This federal program was discontinued for new applications as of March 21, 2024. However, existing participants continue to benefit from the shared equity arrangement.

GST/HST New Housing Rebate

First-time homebuyers can receive a partial rebate of the GST/HST paid on new homes. The rebate is available for homes under $450,000, with a partial rebate for homes up to $562,500.

Land Transfer Tax Rebates

First-time homebuyers in Ontario can receive rebates on land transfer taxes up to $4,000 provincially, and in Toronto, an additional municipal rebate up to $4,475, potentially saving thousands of dollars on closing costs.

Ontario First-Time Home Buyer Tax Credit

Ontario residents can claim up to $750 in non-refundable tax credits for qualifying first-time home purchases.

A Real-World Success Story: Marcus and Sarah's 5% Down Purchase

To illustrate how a low down payment strategy can work in practice, let's follow Marcus and Sarah, a young couple from Toronto who successfully purchased their first home with just 5% down.

The Challenge

Marcus (29) and Sarah (27) had been renting in Toronto for five years. They had saved $45,000 but were concerned it wasn't enough for a "proper" down payment. They were considering waiting another 3-4 years to save 20% down on a $600,000 home ($120,000).

The Solution

Working with a dual-licensed professional, they discovered they could purchase a $550,000 townhouse with their existing savings. Their DualBroker first secured them a pre-approval to understand their buying power.

The Outcome

Two years later, their home had appreciated to $620,000. By entering the market early with their 4.39% locked-in rate, they gained $70,000 in equity while building their savings. Their monthly payment of $2,847 was actually lower than many of their friends who waited, as rates had increased to over 6% by the time others entered the market.

Had they waited to save 20% down, they would have missed both the appreciation and the favorable interest rate environment. Their DualBroker's rate protection strategy saved them from the rising rate environment that followed.

How a Dual-Licensed Professional Maximizes Your Low Down Payment Strategy

Working with a dual-licensed mortgage broker and realtor provides unique advantages when pursuing a low down payment purchase:

Integrated Financial and Property Strategy

A dual-licensed professional can simultaneously evaluate properties and financing options, ensuring your down payment strategy aligns with market opportunities and your long-term financial goals.

Access to Multiple Lenders and Programs

Different lenders have varying criteria for low down payment mortgages. A dual-licensed professional can navigate these options to find the best rates and terms for your specific situation.

Timing Coordination

The timing of mortgage pre-approval, property search, and closing can significantly impact your down payment requirements and overall costs. Having one professional manage both sides ensures optimal coordination.

Market Insight

Understanding both financing trends and property values allows dual-licensed professionals to advise on the best timing and strategy for your low down payment purchase.

Common Myths About Low Down Payment Purchases

Myth 1: "You'll Pay Too Much in Interest"

Reality: While CMHC insurance adds to your monthly payment, the total cost is often less than the opportunity cost of waiting years to save 20% down, especially in appreciating markets.

Myth 2: "Banks Don't Want Low Down Payment Buyers"

Reality: Lenders actively compete for insured mortgages because they're government-backed, often offering competitive rates to qualified borrowers.

Myth 3: "You Need Perfect Credit"

Reality: While good credit helps, many lenders approve low down payment mortgages for borrowers with credit scores as low as 600. However, as of 2024, stress testing requirements mean you must qualify at a rate higher than your actual mortgage rate.

Myth 4: "You Can't Build Equity Quickly"

Reality: Equity builds through both mortgage payments and property appreciation. In many markets, appreciation alone can build equity faster than the additional principal payments from a larger down payment.

When 20% Down Might Still Make Sense

While low down payment purchases offer many advantages, there are situations where 20% down might be preferable:

• Luxury Home Purchases: Homes over $1 million require 20% down
• Investment Properties: Rental properties typically require 20% down minimum
• Debt Service Concerns: If the CMHC premium pushes your debt ratios too high
• Stable Market Conditions: When property appreciation is minimal
• High Interest Rate Environment: When the cost of borrowing makes waiting more attractive

Steps to Prepare for Your Low Down Payment Purchase

1. Calculate Your True Affordability

Work with a dual-licensed professional to understand not just the minimum down payment, but your total monthly carrying costs including mortgage payments, property taxes, insurance, and condo fees.

2. Optimize Your Credit Score

Even small improvements in your credit score can result in better mortgage rates, potentially saving thousands over the life of your loan.

3. Gather Required Documentation

Prepare employment letters, pay stubs, tax returns, and bank statements. Having complete documentation ready can speed up the approval process.

4. Research First-Time Buyer Programs

Investigate available rebates, incentives, and programs that can reduce your overall purchase costs or provide additional down payment assistance.

5. Understand Current Qualification Requirements

As of 2024, all mortgage applicants must pass the federal stress test, qualifying at either the Bank of Canada's 5-year benchmark rate or your contract rate plus 2%, whichever is higher. This applies regardless of down payment amount.

6. Plan for Closing Costs

Budget for legal fees, home inspection, appraisal, and other closing costs, which typically range from 1.5% to 3% of the purchase price. Don't forget to factor in moving costs, utility connections, and immediate home expenses.

Conclusion: Your Path to Homeownership Starts Today

The belief that you need 20% down to buy a home has kept too many potential homeowners on the sidelines. The reality is that with as little as 5% down, proper planning, and the right professional guidance, homeownership can be within reach much sooner than you think.

Working with a dual-licensed mortgage broker and realtor ensures you have expert guidance on both the financing and property selection aspects of your purchase. They can help you navigate the complexities of low down payment purchases, access the best available programs and rates, and develop a strategy that aligns with your financial goals and market conditions.

Remember, every month you wait is another month of rent payments that don't build equity. While homeownership isn't right for everyone, if you're financially ready and committed to staying in an area for several years, don't let the 20% down payment myth hold you back from exploring your options.

The key is working with professionals who understand both sides of the transaction and can guide you through the process with confidence and expertise.