Purchasing a home is a significant milestone, but for many Canadians, the biggest hurdle is saving for a down payment. With soaring property prices in cities like Toronto and Vancouver, the idea of buying a home with just 5% down sounds almost too good to be true. Is it really possible? The short answer is yes, but there are important details to understand before diving in. In this post, we’ll explore how a 5% down payment works in Canada, the requirements, costs, and key considerations to help you decide if it’s the right path for you.

Understanding the 5% Down Payment Option

In Canada, the minimum down payment required for a home purchase depends on the property’s price. According to the Canada Mortgage and Housing Corporation (CMHC), the minimum down payment is:

  • 5% for homes priced up to $500,000.
  • 5% on the first $500,000 plus 10% on the portion between $500,000 and $1,000,000 for homes priced between $500,000 and $1,000,000.
  • 20% for homes priced over $1,000,000.

For example, if you’re eyeing a $600,000 home, you’d need a down payment of $35,000: 5% of $500,000 ($25,000) plus 10% of the remaining $100,000 ($10,000). For homes under $500,000, a 5% down payment is straightforward – $25,000 for a $500,000 home or $15,000 for a $300,000 home.

This low down payment option is designed to make homeownership more accessible, particularly for first-time buyers. However, there are strings attached, including mortgage default insurance and stricter qualification criteria.

Mortgage Default Insurance: A Key Requirement

When you put down less than 20% on a home in Canada, you’re required to purchase mortgage default insurance, also known as CMHC insurance. This protects lenders in case you default on your mortgage. The insurance premium, which ranges from 2.8% to 4.0% of the mortgage amount, depends on the size of your down payment. For a 5% down payment, the premium is typically at the higher end of this range.

For example, on a $500,000 home with a 5% down payment ($25,000), you’d borrow $475,000. If the CMHC premium is 4%, you’d pay an additional $19,000, which is typically added to your mortgage and paid off over the loan’s term. This increases your monthly payments, so it’s critical to factor this cost into your budget.

Who Qualifies for a 5% Down Payment?

While a 5% down payment is appealing, not everyone qualifies. Lenders and insurers like CMHC have strict criteria:

  1. Good Credit Score: A minimum credit score of 680 is typically required, though some lenders may accept lower scores with additional scrutiny.
  2. Stable Income: You must demonstrate a steady income to cover mortgage payments, property taxes, and other housing costs.
  3. Debt-to-Income Ratios: Your Gross Debt Service (GDS) ratio (housing costs like mortgage, taxes, and utilities) should not exceed 39% of your gross monthly income. Your Total Debt Service (TDS) ratio (including all debts) should stay below 44%.
  4. Property Type: The home must be owner-occupied (not a rental property) and meet CMHC’s eligibility criteria, such as being a single-family home, condo, or small multi-unit property (up to four units).
  5. Stress Test: You must qualify for the mortgage at the greater of the Bank of Canada’s qualifying rate (currently around 5.25%) or your actual mortgage rate plus 2%. This ensures you can handle potential rate increases.

First-time homebuyers may also benefit from programs like the First-Time Home Buyer Incentive, which offers a shared-equity mortgage to reduce monthly payments, or the Home Buyers’ Plan (HBP), allowing you to withdraw up to $35,000 from your RRSP tax-free for your down payment.

Pros and Cons of a 5% Down Payment

Pros

  • Lower Upfront Costs: A 5% down payment makes homeownership more accessible, especially in high-cost markets.
  • Faster Entry into the Market: You can start building equity sooner rather than saving for years.
  • Government Incentives: First-time buyers can leverage programs like the HBP or tax credits to offset costs.

Cons

  • Higher Monthly Payments: The CMHC premium and larger mortgage principal increase your monthly costs.
  • Longer Debt Period: A smaller down payment means a larger loan, which could extend your mortgage term.
  • Stricter Qualification: The stress test and debt ratios can be challenging for some buyers.
  • Limited Equity: With only 5% equity, you’re more vulnerable to market fluctuations, especially if property values decline.

Tips for Buying with 5% Down

  1. Improve Your Credit Score: Pay down debts and avoid new credit applications to boost your score before applying.
  2. Save for Closing Costs: Beyond the down payment, budget 1.5%–4% of the home’s price for closing costs (e.g., legal fees, land transfer taxes).
  3. Explore Incentives: Research federal and provincial programs, such as the First-Time Home Buyer Incentive or provincial land transfer tax rebates.
  4. Work with a Mortgage Broker: A broker can help you find lenders with favorable terms and guide you through the qualification process.
  5. Consider a Co-Signer: If your income or credit is borderline, a co-signer with strong financials can improve your chances.

Is a 5% Down Payment Right for You?

Buying a home with 5% down is absolutely possible in Canada, especially for homes under $500,000, but it’s not a one-size-fits-all solution. It’s ideal for first-time buyers with stable incomes, good credit, and a desire to enter the housing market quickly. However, the added costs of CMHC insurance and higher monthly payments require careful budgeting.

Before deciding, crunch the numbers with a mortgage calculator, consult a financial advisor or mortgage broker, and weigh your long-term goals. Homeownership is a marathon, not a sprint, and starting with a 5% down payment could be the first step toward building your future.

Want to learn more? Contact us at 780.792.0009 or charlene@charleneelliot.ca