Buying a New House: How Much Should You Commit to a Down Payment?

The Canadian housing market has been on fire to kick off 2021. Some economists have called for policy makers to step in. This looks unlikely as real estate is powering a reeling Canadian economy during the pandemic. Many Canadians may be thinking about taking the plunge into the housing market right now. Today, I want to discuss how much you should commit to a down payment.

Why you should make a big down payment

There are several advantages to make at least a 20% down payment on your home purchase. First, you avoid having to pay your home insurance premium through the Canada Mortgage and Housing Corporation (CMHC). Moreover, making a large down payment will allow you to access equity in your home much quicker. You may remortgage your home up to 80% loan-to-value, and a home equity line of credit typically runs at 65% loan-to-value.

If you have the cash available it is usually the preferred option to make the 20% minimum down payment, and above that if you are able.

Here’s why you should keep your down payment slim.

There are also arguments for making a smaller down payment. You will be forced to absorb the hit of an insurance premium, but you also avoid committing a substantial amount of cash that will be frozen up in your property. If a larger down payment will take all your cash, it may be better to commit to a smaller chunk of change.

As for the time horizon, interest rates will likely remain at historic lows for the foreseeable future. Committing to a smaller down payment can be a sound strategy for many new home buyers.