Why it’s Time to Ditch the 20% Down Payment Rule

Posted on 13th September 2015

First-time Canadian home buyers generally hold fast to the 20% down-payment rule in an effort to avoid paying default insurance. But with the red-hot Canadian housing market showing no signs of slowing down, it might make more sense to jump on the property ladder with or without that 20% down payment.

Canadian Real Estate Market Remains Strong

The Canadian housing market remains strong. In August, the average price of a home sold in Canada was $433,367, an 8.7% increase over the last year. On top of that, sales were up four percent over the same period.1

The hottest areas in the country for real estate continue to be the Greater Toronto Area , including Hamilton, and Vancouver and the Lower Mainland. If you take these cities out of the equation, the average Canadian home in August was worth $338,755; a more reasonable 4.2% increase year-over-year.

The strong price and sales growth is testament to the long-term value Canadian home buyers put on the value of home ownership in this country. Unfortunately, steadily rising housing prices have many Canadians thinking they are being priced out of the housing market.

And you may be if you’re trying to save a 20% down payment.

Why It Makes Sense to Buy a Home with Less Than a 20% Down Payment

Conventional wisdom holds that you should wait to buy a home until you have a down payment of at least 20%. With a 20% down payment you avoid having topay mortgage default insurance . But with housing prices rising so fast, waiting an extra year or two to save for a 20% down payment could more than offset the savings on mortgage insurance.

If you have a down payment of less than 20%, you have to pay a premium to insure your lender should you default on your mortgage payments. The default insurance is typically added to your mortgage principle.

If you have a down payment of less than 10% (five percent is the minimum in Canada), mortgage insurance will cost you 3.6% of the purchase price. If you have a down payment of less than 20% but more than 10%, the insurance premium ranges from 1.8% to 2.4% of the purchase price.

If you live in Manitoba, Ontario, or Quebec, you also have to pay provincial sales tax. In the end, everyone that takes on default insurance means their principle monthly payments increase and you pay extra interest.

Pay Now or Pay Later

In Canada, the average house price is $433,367. If you have a 10% down payment, your default insurance will be an additional $9,361. If you have a five-year fixed mortgage of 2.59%, your monthly payments will be $1,807.

If you had a 20% down payment, your monthly mortgage payments fall to $1,569. And the total interest paid over the five-year term of the mortgage also falls from $47,681 to $41,390.

So is it worth it to wait two or three years to save up that 20% down payment? With housing prices rising five percent annually and interest rates poised to rise, you could end up paying more each month if you wait.

For many Canadians trying to get on the property ladder, it makes more sense to get into the market now than wait to scrimp and save a 20% down payment.

Canadalend.com: Helping You Find the Best Mortgages

If you’re looking to step onto the property ladder and don’t have the typical 20% down payment, it might make more sense to buy one now in this hot market than wait and pay more later. And with a smaller down payment, getting the best mortgage at the best rate is even more important.

That’s why it’s essential that you contact the licensed, independent agents at Canadalend.com . They’ll show you how different down payments and added default insurance impact your monthly mortgage payments.

To see what kind of mortgage you qualify for with your down payment, contact the mortgage experts at Canadalend.com today. Or apply online and one of our lending specialists will help you set up an appointment for a free, personal consultation.


1. “Canadian home sales little changed in August,” Canadian Real Estate Association website; http://www.crea.ca/canadian-home-sales-little-changed-august.

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