More About 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 for Canadians

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 you default and they have to take the property back to sell it in order to get their money 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.

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." 

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:

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

• house, town house, duplex, condo
• purchase price under $500K
• owner-occupied
• good credit
• Canadian tax-payer
• not on a large acreage*
• self-employed is okay as long as you declare sufficient personal income**
• the loan is CMHC-insured***

For example, to buy an owner-occupied home that costs $500,000, you will need a minimum of $25,000 as your down payment plus another $5,000 to $7,500 for closing costs (depends on your location and property transfer taxes).

Scenario 2 for homes from $500K to under $1M: Five percent (5%) on the first $500K and 10% on the the value above that (plus 1-1.5% for closing costs), assuming:

• house, town house, duplex, condo
• purchase price between $500K and $1M
• owner-occupied
• good credit
• Canadian tax-payer
• not on a large acreage*
• self-employed is okay as long as you declare sufficient personal income**
• the loan is CMHC-insured***

Scenario 3 for homes over $1M: 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
• purchase price $1M or more
• owner-occupied or rental
• Canadian tax-payer
• not on a large acreage*
• self-employed is okay as long as you declare sufficient personal income**
• the loan is CMHC-insured***

*   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, Sagen 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
• owner-occupied or rental
• Canadian tax-payer
• not on a large acreage*
• self-employed is okay 
• generally, properties valued over $1M will be subject to increased equity requirements

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 we send to our 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 to see the transaction 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 if you want to avoid a 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 (you must provide the 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.

Down Payment Documentation

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 FINTRAC Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations. 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).