More about equity and down payment

Equity & Down Payment

 “To get a mortgage in Canada, you have to have some of your own money in the deal, and more is always better.”

Equity, Down Payment & Mortgage Qualification

To get a mortgage in today's lending environment, you’ve got to have “skin in the game,” which is the money you put into the purchase of your property as a down payment or equity that you retain. Different property-types have different down payment requirements. The equity you have in the property helps to protect the lender from loss in the event they ever have to take the property back (foreclose).

Table of Contents 

  1. What is the Difference between Down Payment and Equity?  
  2. How Much Down Payment Do You Need to Get a Mortgage?
  3. Minimum Down Payment for a House in Canada
  4. Minimum Down Payment for Other Property Types
  5. Acceptable Down Payment Sources
  6. Self Assessment - Equity / Down Payment
  7. More Resources on Equity & Down Payment
  8. Return to 'Can You Get a Mortgage' Overview

What is the Difference between Down Payment and Equity?

Down Payment is the amount of money that you can immediately contribute towards the purchase of a property. Since the majority of people do not have enough savings to purchase a property outright, the gap between your down payment and the purchase price is made up with a mortgage loan.

Down Payment + Mortgage Loan = Property Purchase Price

Equity is equal to your down payment only at the moment of purchase. Equity is defined as the difference between what a property is worth and what you owe on it. It is important to understand that over time the value of your property will fluctuate up or down while your mortgage loan balance is paid down, hence your equity will change. If your property value exceeds your mortgage balance, you have what is called "positive equity." If your mortgage balance exceeds your property value, you have what is called "negative equity." 

Equity = Property Value - Mortgage Balance

Loan-to-Value or LTV is an important term to understand when talking about down payment,  equity, and mortgages. LTV is the proportion of the mortgage loan to a property's value and is expressed as a percentage. An 80% LTV means the mortgage loan represents 80% of the property's value and your down payment or equity represents the remaining 20%.


How Much Equity / Down Payment Do You Need to Get a Mortgage?

Your minimum down payment or equity requirement (summary in next section) will vary from lender to lender and will depend on:

  1. property type (house, acreage, raw land, new build, etc.),
  2. property's intended use (residential, investment, commercial, farm, etc.),
  3. whether you are purchasing a new (to you) property, refinancing an existing property, or renewing your mortgage at maturity,
  4. your credit profile,
  5. how you earn your income, and how much of that income shows up on your personal tax returns,
  6. estimated 'closing costs' for your transaction (lawyer, land transfer tax, land titles fees, appraisal, inspection, property tax adjustment, other fees, etc.),
  7. and the lender's specific internal guidelines.

Minimum Down Payment for Houses in Canada

To purchase an existing house in Canada, the general minimum down payment is:

1) 5% of the purchase price PLUS 1 to 1.5% for closing costs, assuming:
- house, town house, duplex, condo
- value under $500K
- owner-occupied
- good credit
- Canadian tax-payer
- not an acreage*
- not self-employed**
- the loan is CMHC-insured***
- Canadian tax-payer

For example, to buy an owner-occupied home that costs $300,000, you will need a minimum of $15,000 as your down payment plus another $3,000 to $4,500 for closing costs (depends on your location). 

2) 5% increasing to 7.5% for purchase prices between 500K and less than $1M  (plus 1-1.5% for closing costs), assuming
- house, town house, duplex, condo
- owner-occupied
- good credit
- not an acreage*
- not self-employed**
the loan is CMHC-insured***
- Canadian tax-payer

3) 20% at least for purchase prices in excess of $1M (plus closing costs) increasing towards 35% as values move above $2M, assuming
- house, town house, duplex, condo
- owner-occupied
- good credit
- not an acreage*
- not self-employed**
- Canadian tax-payer (else 35% minimum)

*   Houses on acreages larger than 10 acres or with out buildings can have bigger down payment requirements
**  Self-employed who over-minimize their taxable income may need a bigger down payment
*** 
If you have under 20% down payment, you will need Mortgage Default Insurance from CMHC, Genworth or Canada Guaranty. If you have over 20% down payment, you may qualify for a conventional mortgage which generally does not require Mortgage Default Insurance and avoids the fee.

For other down payment requirements on different property types and situations, please see the property- and situation-specific discussion pages

To refinance a house in Canada that you already own, the general equity guidelines are:

You must retain 20% of the appraised value as equity in the home meaning you can borrow up to 80%, assuming:
- house, town house, duplex, condo 
- value for lending purposes to be confirmed by a lender-approved licensed appraiser
- good credit and sufficient income

- Canadian tax-payer
- not an acreage*
- Canadian tax-payer
- generally, properties valued over $1M will be subject to increased equity requirements
Free Guide: Borrowing on Home Equity 

More on the equity requirements for different property types and/or situations 


Acceptable Down Payment Sources 

A question that often comes up with clients is about permitted sources of down payment and how long the money has to be sitting in the client's account. Here's the list I send to my mortgage customers:

Down Payment

You must prove the source of the down payment plus 1-1.5% more for closing costs (lawyer, inspection, appraisal, property tax adjustment). Please provide clear copies of any combination of the following as they apply to proving the source of your down payment:

  • Accumulated Savings - provide the last 90 days of applicable savings and chequing bank account statements showing applicant’s name and account number.  Explain any large deposits.  Need history from each account that held the money. 
  • RRSP/TFSA/Investment Accounts - **Last 90 days** of account statements showing applicant’s name and account number – RRSP amounts must be at least 90 days old to avoid tax withholding
  • Gift - Gift letter signed by all parties, copy of actual cheque, and proof of deposit.
  • Sale of Property – copy of signed Offer to Purchase, your Mortgage Lender's most recent year-end statement (or more recent on-line version), current copy of the property title (30 days old max).
  • Divorce Settlement – copy of divorce papers and proof of deposit OR lawyer’s proof of money held in trust
  • Inheritance Amount – legal documentation and proof of deposit
  • Sale of Vehicle or other Asset – Bill of Sale, copy of your old registration, and proof of deposit
  • **NO** "mattress funds" – unexplained or undocumented cash must be deposited to your bank account and AGED for 90 days (re: the Money Laundering Act)
  • Existing equity in different property via HELOC (provide title and mortgage details for that property)
  • Borrowed money via Line of Credit or Personal Loan (provide loan or LOC details).

Cash Incentives

In all cases, the buyer CANNOT borrow or receive monies from anyone related to the subject property sale nor can the vendor provide a cash incentive to buyer. The seller however could agree to improve the property, such as a new roof, as a purchase incentive provided it is documented and completed prior to the possession date.

Proceeds of Crime

Important to understand is that the lenders are obligated to trace the source of all down payment money used in real estate transactions under the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (here). This doesn't mean money must be in your account 90 days in order to use it.  Rather, it means that for any deposits made to your account within 90 days of your purchase transaction, you must provide the paperwork that clearly supports where the money came from / source of those funds (and be legal). 


Equity / Down Payment Self AssessmentEquity Self Assessment

In this section, we quickly review what things lenders are looking for to approve your source of down payment for a purchase and things that might create problems. If you want to keep score, grab a piece of paper and a pencil and note the number of Probably OKs and how many Potential Problems. After this section, there are More Resources which you can explore further.

To perform the following self-review for Equity, note how many Probably OKs and how many Potential Problems.

Your down payment for a purchase is probably okay for a mortgage if…

  • You have personal savings, RRSP, TFSA, investments, etc. accumulated over time.
  • A close family member “gifts” you all or a part.
  • Your employer gives you a bonus or loan.
  • You get a big tax return.
  • You sell something you own – like a car.
  • You borrow the money from an accredited lending source like a bank.
  • You refinance an existing property that you own to come up with the cash
  • In all cases, you can clearly document where all the money came from, going back 90 days.
  • You have enough equity or down payment to cover at least the minimum identified above for the type or class of property that you are trying to finance (i.e. 5% down payment and 1% closing costs to purchase an existing house that you will occupy, higher for other property types)
  • If you have a BIG down payment, like 25% or more, we can often get around any of the Income and credit requirements in the previous sections.

# Probably OKs?______

There might be a problem with all or some of your down payment if…

  • Your RRSP is actually a LIRA.
  • Some of the money was recently a cash deposit with no supporting paperwork (“mattress money”).
  • Any part is coming from the property seller or builder.
  • The money/gift is coming from a spouse or partner who is not going to be on the mortgage.
  • The landlord says he will credit you part of the rent you have paid if you buy his house.
  • The money is coming from overseas from a country on the government’s no-can-do-list.
  • You don’t have the paperwork to support what you sold.
  • You have money, but can’t prove where the money came from, or is un-taxed money (for example, tips).
  • The money cannot be traced or clearly documented as to the source
  • You don't have at least the minimum amount of down payment or equity required for the property type you are trying to finance (as identified above).

# Potential Problems?______

To qualify for a mortgage today you should have:

Down Payment/Equity3 or more OKs, and no potential problems

It is important to know that there are many mortgage lenders and each lender publishes specific guidelines as to what minimum down payment is acceptable to them per property and transaction type. While one lender might say no, another might say okay. A mortgage broker can help identify and short-list which lenders are more favourable than others for your situation.

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More Resources on Equity & Down Payment

Down Payment Sources

Home Buyer's Plan - use your RRSP

Down Payment Assistance Programs

Free Gift Letter Template

Can I use my RRSP to buy a home?

Borrowed down payment mortgage program 

Is there still such a thing as a zero-down mortgage?

Savings Strategies

Using your RRSP for your down payment

Great Tool to Automatically Save for a House-Down Payment

Setting a Down Payment Savings Goal - How Many Months to Achieve?

Hard Core About Getting on Top of Your Finances? explore Mr Money Mustache

First Time Home Buyers - E-Z Down Payment Savings Plan Using Your RRSP 

Money can't buy you happiness, but it sure helps to get a mortgage!

Considerations

How the size of your down payment affects the total costs to borrow over life of a mortgage 

Closing and Other Costs for First Time Home Buyers

Other Articles &  Blogs

How Much Down Payment Required - It Depends... 

What Are the Down Payment Requirements for an Alberta Mortgage?

Cash-back-from-the-builder-vendor-can-I-do-that? 

 

Return to 'Can You Get a Mortgage' Overview


   

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