In this blog, I provide a refresher on the down payment (equity) requirements for residential mortgages. It is a very common question and the answer depends on many factors. It depends on the property type (house/condo, acreage, vacant lot, farm etc.), who’s going to live in or on the property, how you earn income, and your credit rating. It also depends on whether you are looking for purchase financing or to replace/renew an existing mortgage. In this article, I am going to try and simplify the various ‘lending rule books’ for you in only 600 words!
Let’s look at property type first. If there is no house, then the lending category is not considered ‘residential’ and different rule books will apply. For example, mortgages for vacant land, building lots, commercial and farm lending all have different guidelines. For non-residential property, equity requirements are generally between 25% and 50% of the purchase price/value. Even if you are buying a lot or acreage to eventually build a home, it still fits here for now.
More familiar to most of us is financing an existing or new-build home. If you are going to occupy the property yourself (not rent it out), then the property can be purchased with as little as 5% down. Some people think the 5% down option is only for first time buyers, but not true. Under 20% down payment on a purchase simply means the loan must be CMHC-insured against borrower default, and a CMHC fee premium is added to the mortgage amount. If you are looking to renew your mortgage for another term (say 5 years) and the loan was originally CMHC-insured and you are not seeking any new money, then you can simply transfer the mortgage to the next lending institution with no cash / equity requirement. However, if you are looking to refinance a residential property (equity-take-out) or purchase a rental property, your down payment or equity will need to be 20% or more.
The residential down payment requirements above are minimums. Other factors might require larger down payments. For example, as properties become more expensive lenders start to reduce the maximum loan-to-value that they will provide. One such restriction is CMHC-insured residential purchases where the maximum purchase price cannot exceed $1mil and at that price point, the minimum down payment is 7.5%. Over $1mil you will need at least 20%-25% down and that will increase as the price increases. Borrowers who have had past credit difficulties such as a bankruptcy or consumer proposal will likely need at least 10% down for purchase plus other requirements. For those with current credit difficulties, expect your down payment / equity requirements for purchase or refinance to be at least 20-25% of the property value. Likewise, self-employed borrowers who are not reporting much income on their tax returns are looking at 10% (if good credit) to as much as 35% down payment/equity, at which point credit and income don’t matter as much to lenders. Finally, let’s touch on the cash requirements for draw construction financing. Generally, if you want to acquire a lot and pay the builder in stages (called draws), you will need 30% to 35% of the entire project cost in cash and/or existing equity as a starting point.
In summary, down payment requirements depend on a combination of the property type and value, whether it’s a purchase or refinance, and finally on the qualifications of the borrower.
About the author - Chris Richards is a licensed mortgage broker with Quantus Mortgage Solutions and can be reached here.