Saving for Your Down Payment
Getting a mortgage is a big step and one of the first steps to home ownership is saving the amount of money you put down on your first home. The more funds you can put toward your down payment, the less you’ll have to borrow and the lower your monthly mortgage payments. A typical down payment ranges between 5% and 20% of the total cost of your new home. If your down payment is less than 20%, then you’ll have to pay mortgage insurance on your loan.
Saving for your down payment doesn’t have to be difficult. BMO can help you put together a savings plan to help you get into your first home faster.
Ways to save
The down payment you put toward your first home will likely come from your own savings. There are lots of ways to grow your funds. It's just a matter of finding a plan that works best for you.
Personal Savings and Assets
If you’ve been putting money away for years, you might have a significant sum in a savings account or you may have savings bonds that have matured. Likewise, other sources of income can come from life insurance dividends, a bonus from work or an income tax refund. It all adds up and can be used towards your down payment.
Your RRSP
Under the Canada Revenue Agency Home Buyers' Plan, individuals may withdraw up to $25,000 tax-free from their Registered Retirement Savings Plan to use towards the purchase of a new home. That means that you and your spouse or common-law partner together can withdraw up to $50,000 tax-free. Keep in mind that you will have to pay back your withdrawal in equal payments over 15 years beginning the second year after the withdrawal. Learn more about the Canada Customs and Revenue Agency Home Buyers' Plan.
Continuous Savings Plan
Put aside a sum you can afford each month automatically from your chequing account into a high interest savings account with a Continuous Savings Plan and watch it grow. If you make RRSP contributions, they are tax-deductible and can help reduce your income tax.
- Calculate The Value of Continuous Saving
Tax Free Savings Account
A Tax Free Savings Account (TFSA) is a savings plan to help you save and invest up to $5,000 a year without paying tax on the money you earn and withdraw. Learn more about TFSA at bmo.com.
- Calculate The Value of Saving Tax-Free
Gifted Funds
Money you receive as a gift is eligible for your down payment provided it doesn’t have to be paid back. The person gifting the funds to you will be required to complete and sign a gift letter for your lender to verify.
Putting money away for your down payment is the first step toward reaching your home buying goals. All you need is a little discipline and some really good advice. Before you know it, you’ll have enough for your down payment.
How much do I need to save?
Getting into your first home can happen faster than you think. All you need is a down payment of as little as 5% of the purchase price of your new home. In addition, you’ll need to budget around 3-4% of the purchase price for closing costs (cash-on-hand) and other one-time costs over and above your down payment.
If you can afford to put down more than 5%, that’s great – the higher the down payment the less you have to borrow which means you’ll use less of your income to repay the mortgage. The amount you save for your down payment will determine the type of mortgage required.
High-ratio mortgage
A down payment of less than 20% of the purchase price will qualify you for a high-ratio mortgage. A high ratio mortgage requires you to get default insurance in the event you are unable to make the payments. You may opt to have your mortgage default insurance premium added to your mortgage, increasing your monthly payments or you may opt to pay it in full up front. For high ratio mortgages, at least 1.5% for closing costs is required in order for you to qualify for mortgage default insurance.
The bigger your down payment, the smaller your mortgage will be. See the chart below for how you can reduce your overall mortgage cost.
The table below provides an example of the mortgage insurance premium for a $200,000 home, depending on the down payment applied.
| Home Price | Down Payment | Mortgage amount required before insurance | Mortgage default insurance premium (added to total mortgage amount) | Total mortgage amount required |
|---|---|---|---|---|
| $200,000 | 5% ($10,000) | $190,000 | 2.75% ($5,225) | $195,225 |
| $200,000 | 10% ($20,000) | $180,000 | 2% ($3,600) | $183,600 |
| $200,000 | 15% ($30,000) | $170,000 | 1.75% ($2,975) | $172,975 |
If you take a high-ratio mortgage that has an extended amortization (i.e. greater than 25 years, up to and including 30 years) a premium surcharge on your mortgage will apply. Speak to your lender for complete details
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| 5 Year Low Rate Mortgage (closed) |
% APR** |
| Prime Rate | % |
| Smart Saver | % |
