9 Things You Need to Know About Condo Down Payments

There are a few things you should know about condo down payments. While the process of buying a condo isn’t more complicated than for a traditional house, there are a some subtleties first-time condo buyers need to know. Decisions on the down payment can affect monthly mortgage payments.

What Is a Down Payment?

A down payment is the initial sum put towards a house purchase. In Canada, every lender requires a down payment. The minimum is 5% of the sale price of the property.

The size of your down payments affects your mortgage in the following ways:

Mortgage default insurance is required on down payments less than 20%. This insurance affects the size of your monthly mortgage payments.
A small down payment comes with higher interest rates. The larger the down payment, the better your chances of getting a good rate will be.
Monthly mortgage payments will be depend on the size of the down payment. The more you put down, the smaller your payments will be.

Example of a Condo Down Payment

Let’s say you’re interested in buying a new condo in Toronto for $400,000. The minimum down payment is 5% which means $20,000 ($400,000 x 5%).

To calculate it the other way around, let’s say you have $30,000 and were buying a a $400,000 property. Your down payment would be 7.5% ($30,000 / $400,000).

Why Are Down Payments Required?

Lenders require down payments to reduce their risk. Remember, they are the ones lending you hundreds of thousands of dollars.

A down payment is a basic form of risk management for the lender. It shows a lender that you have enough money to purchase a property. It’s also an amount the lender can get back if you were to default on your mortgage.

Minimum Down Payment Requirements in Canada

The minimum down payment in Canada varies based on the purchase price of a property.

Less than $500,000: 5% of the purchase price.
$500,000 to $999,000: You’ll need 5% for the first $500,000 and 10% for the remaining value.
More than $1 million: 20% is the minimum.

Note – If you have poor credit history or are buying a condo and have large debts, you may be have to provide a bigger down payment. Check with your mortgage broker before you start shopping for a condo.

Can You Buy a Condo in Canada With 0% Down?

All lenders require a down payment. But the some lenders aren’t particular on what the source of the down payment is. There are a few options available if you don’t want to use savings as a down payment:

Borrow from a line of credit. You can tap into existing lines of credit. However, not all lenders allow this sort of financing. Note that on top of mortgage payments you’ll have to make regular payments to repay this loan.
Gift from your family (or borrow from them). With cost of living increases, Canadians are struggling to save up. Many first-time condo buyers are turning to family for help. Most lenders accept this type of financing.
Place a lien against an existing property. You can tap into the equity of an existing property if you already have one.

Note – Contact your mortgage broker before opening a line of credit or borrowing against the equity of an existing property. Your credit situation may preclude you from owning a mortgage on top of other debts.

The Size of the Condo Down Payment Affects the Rate You Get

Lenders tend to offer favorable interest rates to individuals with high credit scores and large down payments.

Why is that?

Lenders view borrowers who make minimum down payments as risky. To cover this risk, lenders ask for a higher interest rate. It’s in a lender’s best interest to reward borrowers who make a larger down payment.

Get a Mortgage Broker to Negotiate Rates for You

Mortgage brokers can negotiate a better rate for you, even if you only have 5% down and poor credit. They have access to lenders outside the major banks. This means more lending options and better rates for you.

Pros and Cons of Small vs Large Condo Down Payments

Like all things in real estate, there is no clear cut answer. When it comes to the size of down payments, there’s pros and cons to putting a small or a large one down:

Low condo down payments will allow you to keep more of your cash. Over the life of the mortgage you’ll make higher monthly mortgage payments. But at least you’ll have cash on hand for renovations.
High condo down payments will leave you with less cash after closing. However, your payments will be smaller and you’ll probably get a better rate. This will make it easier for you to balance your budget. You’ll also pay less mortgage default insurance (more on that below).

Don’t be afraid to play around with the numbers with your mortgage broker. You’ll get a better feel for how much your monthly mortgage payment will be.

Note – Your mortgage broker can help you determine how affordable a mortgage is based on your financial situation. It’s in their best interest to get you into a mortgage you can afford. If you aren’t satisfied with their services, you’re unlikely to return to them when your mortgage is up for renewal.

What Is the CMHC Fee?

Mortgage default insurance is often called CMHC fee. It protects your lender should you default on your mortgage. Without it, mortgage interest rates would be higher. This would make it harder for Canadians to buy in the real estate market.

Note – While it’s often called the CMHC Fee, mortgage default insurance is offered by CMHC as well as Genworth and Canada Guaranty.

In Canada, mortgage default insurance is mandatory for purchases with down payments between 5% and 19.99%. It is a cost that varies between 2.8% and 4% of the property price. It gets added to your mortgage. That means you have to pay it through mortgage payments.

The amount you’ll have to pay depends on your condo down payment. Here is a quick breakdown of the fees:

5 – 9.99%	10 – 14.99%	15 – 19.99%	20%
4.00%	3.10%	2.8%	0%

How Mortgage Default Insurance Affects Your Payments

Your lender will pass the costs of your CMHC Insurance on to you. Borrowers can make this payment as a lump sum or have it added into their total mortgage payment.

Here’s an example:

You purchase a condo for $400,000 and have $40,000 (10%) saved for the down payment. That means you need to borrow $360,000.
For a 10% down payment, the mortgage default insurance premium will be 3.10%. On $360,000 that’s $11,160.
You can pay the $11,160 in a lump sum or you can add it to your monthly mortgage payments. If you choose the second option, your mortgage is now $371,160.
At 3.25% over 25 years, $11,160 means your monthly mortgage payments will go from $1,820 to $1,770. That’s $50 more a month over the course of the entire 25 year mortgage!

Difference Between Resale and Pre-Construction Condo Down Payments

There are specific pros and cons to resale vs pre-construction condos. But it’s not just the process of buying one that’s different. Both resale and pre-construction condos have different financing requirements:

Most resale condos are financed via traditional mortgage rules. Just like a house or townhouse, you can buy one for as little as 5% down. Of course, this depends on your credit profile and the price of the condo.
Pre-construction condo down payments vary by builder. Most builders ask for 20% which is paid in slices of 5% following a specific payment schedule.

Note – Although you may not have pay mortgage default insurance, new condos are subject to HST. This tax gets added to the sale price of the condo. Some condos qualify for tax rebates. Most builders will apply for the HST rebate on your behalf so that it doesn’t get added to your mortgage.

What Is a Rent to Own Condo?

In rent to own, you sign a standard lease agreement and the option to purchase the property later on. A portion of your monthly rent is put aside every month. When you are ready to buy the condo, that money is used as a down payment.

You combine the benefits of buying a condo with the financial ease of renting. Many Canadians are turning to lease to own condos to purchase their first properties.

Note – Rent to own condos are great for those in difficult financial situations. However, they may be hard to find. Real estate agents can help you find a rent to own condo. With their industry contacts, they could even introduce you to an investor who may be willing to setup a rent to own contract for a specific condo.

Wrapping Things Up

Ideally, a large down payment is preferable. However, in today’s economy this isn’t always possible. Contact a mortgage broker to find out which options are available for you.