How Much Down Payment for a House?

One of the most significant barriers facing first-time home buyers is saving enough money for the down payment. In previous posts, I described some of the special investment accounts we have to help with that. The FHSA, RRSP Home Buyer’s Plan, and the TFSA can be used to strategically boost your down payment. In this post, we will explore how much you should target for a house down payment based on your needs, wants, CMHC insurance costs, and closing costs.

How Much House Do I Need & Want?

Once you start house shopping, it is extremely easy to get caught up in reaching further and further. It is exciting, your realtor benefits from you spending more, and the process lends itself to sales. In most cases, the bank is not going to be a voice of reason that reins you in. They will lend you as much as you can borrow without defaulting – even if that means you never get to go out, except to forage for food in the backyard. You may even be tempted to take on more debt relative to your house down payment, and lower interest rates on CMHC-insured or larger mortgages may subtly break down your resistance.

Your family and friends may not deter overspending on housing. Those who have overspent would like to have some foraging partners. Your parents may see housing as a better “investment” than it is, given the past 20-year bull market. Most people also forget about inflation, maintenance, and the opportunity costs when they think of their “housing investment” returns.

So, it is critically important that you consider what the “must haves” are for your home purchase before you get into the process. Write them down. Differentiate needs from wants. You will need this grounding when you start shopping.

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Common Housing Needs

The most important needs are those that impact your daily life and are difficult to change. Location, location, location is a real estate saying for a reason. Common location considerations are proximity to work, good schools, and the amenities that you use often. Those needs may sometimes compete with other preferences, like having a larger yard, backing onto a green space, or being in a low-traffic area. If buying in the country, look for surrounding livestock farms and consider which way the wind blows.

Basic size and layout are also difficult or impossible to change. Consider the rooms you use most, such as the kitchen, living room, and recreational areas. How is the flow between them? Do you want an open concept to constantly know what is going on around the house, or do you prefer some nooks and crannies to hide in when the in-laws visit?

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Common Housing Wants

The list of potential wants is personal and endless. There are some common ones that may be hard to add to a home later. Renovations that require a change to the house’s footprint or structural walls are difficult and expensive. If the rooms are large enough and just outdated, then they may be renovated to fulfill some of your wants later. Another important want may be the view out of your windows, or into your windows from neighbors. That is hard to change (location, location, location).

The list of wants and needs will be different for everyone. Also, consider whether those are likely to change in the near future as your life changes. Write them down and rank them. It may be useful to prioritize when deciding on trade-offs. It is also important because when you own a home, the bar may be raised. While you may have been totally happy with a certain level of functionality while renting, you may spend extra to renovate to a much higher level of luxury when you own it. I learned that lesson from personal experience.

We built that house shown above, but eventually realized it was too much house for us. Even though we could afford it and made a large house down payment relative to the mortgage.

How Much House Can I Afford?

This is a critical question to answer accurately. The people that I know who are in the biggest financial trouble often got cornered there as a result of spending too much on real estate. Not only is it a big purchase, but it is also expensive to maintain. If you have over-reached, it is also difficult and expensive to sell and move.

Some buy real estate that may not suit them for long, but think that they’ll just keep it as a rental if they move. They often underestimate the hassle involved. Further, they usually did not buy the property with a business plan in mind, and it is often a money-hemorrhaging “investment”. They are depending on the house rising substantially in value each year. If the home drops in value and the equity in it is not enough to cover the realtor’s fees and the costs of selling/moving, they could even be trapped and unable to afford to sell.

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Rules of Thumb

You’ll see all sorts of rules of thumb thrown around about how much mortgage or house you can afford. They are not very useful. Just using a multiple of your gross income ignores the bite of our progressive taxation system. You pay for a house and living expenses from after-tax income. Even using a multiple of your after-tax income and accounting for your current debt, as the banks do, doesn’t really account for your other costs. Those are highly variable depending on kids, travel, commuting costs, and a wide range of lifestyle expenses that may be more important to you than home ownership. The banks assume that you will cut anything required in order to keep paying your mortgage.

The rules of thumb are also arbitrary, and I commonly see people adjust the rule of thumb upwards because housing in their area costs more, to make it fit their desire to buy a house, whether affordable or not.

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Model Your Cash Flow

The best way to see whether you can afford a certain house is to model its costs and see how they fit with your income and other costs. Matt Poyner (CFP) has a great article on his Med School Money Substack about how to do this, along with a worksheet. I will hit the highlights below, but I encourage you to use it.

Start with your after-tax income. If you are incorporated, account for both the corporate tax and the personal tax you’d pay to get the money into your hands as salary or dividends. The purpose of having a corporation is usually to leave money invested in it each year. Consider how much you need to leave in your corporation each year to make it worthwhile. If you are draining it to pay your living expenses, that is a problem. Here is an online calculator that models personal tax alone, and I have one that models cash flow and taxes with a corporation in the mix.

Consider the full costs of ownership. People often think of the mortgage payment, but you also have to pay property taxes. Annual maintenance averages 1-2% of the home’s value. That sounds like a lot, and it may not be every year, but big expenses like roofing, appliances, driveways, weeping tiles, and various updates are lumpy and large. When you own a home, you will discover all sorts of expensive systems that can break and are expensive to fix. If you don’t pay the costs to maintain and update the house, you will pay them when you try to sell. Insurance is more expensive for homeowners than for renters, and you will also have to factor in utilities.

How much does living cost? You need to account for your essential costs, such as food, clothing, and personal care. If you have kids now or plan to have them soon, then factor that in. They are expensive. Also consider “optional” expenses that you value more than owning a home.

Investing. You can’t eat your house. Unless it is a gingerbread house. Which seems kind of cool, until it rains. So, you will need to invest money to grow and pay for your costs when you can no longer work. Most high-income professionals are a decade behind when they start making the big bucks. Time is the most important variable for compound returns, so you can’t put it off further than necessary. Plan to keep enough financial room to use your RRSP, TFSA, and RESP (if kids).

You want to see that your after-tax income can cover the house, your living expenses, investing for your future security, and a decent buffer (because stuff always happens).

Bigger House Down Payment = Better?

We all have competing priorities for our limited dollars. A very common question is whether to direct more money toward a down payment or invest it in tax-sheltered accounts for the future. This is essentially a variation of the pay debt vs invest debate. You must repay (or pre-pay in the case of a down payment) enough that the debt amount is not keeping you up at night. In the case of mortgages, there are a couple of other wrinkles to consider.

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The Power of Real Estate is Leverage

Historically, when you account for ownership costs, housing has increased at roughly 1-2%/yr above the rate of inflation. Yes, it was much higher over the last 20 years in Canada, but that is an outlier to longer-term or more global data. In contrast, equity markets have historically returned 4-5%/yr above inflation (more in the recent past and North America also). Even if you just look at the last 20 years in Canada, the TSX increased more than house prices. The average Canadian probably doesn’t realize that.

The power of real estate is leverage. For example, a 1-2%/yr growth rate can be applied to $1MM with only $200K of your money invested and an $800K mortgage. That acts like a 4:1 lever, making the 1-2%/year become 4-8%/yr due to the loan. A smaller loan and more home equity reduce that. Of course, it also reduces risk because that 4:1 lever works against you if prices drop. A 20% drop in price could wipe out 100% of your home equity. There are plenty of people who bought in 2021 who are experiencing that now.

So, having a larger down payment and a smaller loan reduces both risk and return. The money diverted to make a smaller down payment could be invested in equity markets for higher returns if that is your priority. If you would otherwise invest in bonds or GICs with a low risk/return, it is less of a debate. Building home equity is more attractive in that case. A mortgage also comes with discipline enforcement. You can’t sell on a whim, and you can’t miss repayments. The right balance of these factors is different for everyone.

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Home Down Payment Size & CMHC Insurance

Besides long-term returns, down payment sizes of less than 20% have an immediate return difference. If a down payment of less than 20% is used, then Canadian Mortgage & Housing Corporation (CMHC) insurance kicks in. This government-backed insurance makes the mortgage lender whole if you default. That has two implications. First, you have to pay a premium for that, which increases as your down payment shrinks. That cost is added to the mortgage. Second, lenders will offer a slightly lower mortgage rate on insured mortgages because they bear less risk.

How does that all play out? I will model it with a one-million-dollar house purchase in Ontario using a 20-year mortgage. Of note, there are higher premiums for amortizations beyond 25 years or for buying rental units. There is a good CMHC premium calculator on WOWA. I used the Jan 2026 mortgage rates for a 5-year fixed mortgage from a big bank on ratehub.ca.

As you can see in the example above, having a smaller down payment on the home results in a higher insurance cost. It gets added to the mortgage. So, not only do you pay that, but you pay the extra interest on it. Even though banks offer a lower rate on insured mortgages, the payments are higher, and more interest is paid overall. The premiums increase stepwise when the down payment shrinks, in 5% brackets (<10%, 10%-14.99%, 15%-19.99%). So, reducing the budget or finding a little more money to put you into the next premium bracket may be wise.

Don’t Forget Closing Costs

As you try to save more for a down payment, remember that there will also be closing costs. You must come up with the cash to cover those.

Lawyer fees are typically about $2K. There may also be disbursements for utilities or taxes already paid by the seller. Title insurance is usually another $500-600 and is sold via the lawyer.

The land transfer tax is paid for by the buyer. It varies by province, but this is typically thousands of dollars. For example, in Ontario, it would be $16500 for a one-million-dollar home. There may even be an extra layer of land transfer tax. For example, Toronto doubles the cost to $33K for a million-dollar home. You would have to check for your location, but be sure to account for this cost.

Even though not a closing cost, remember to budget for moving. You will also likely discover renovations and repairs after moving in that you did not anticipate. Again, have some buffer.

Planning For Your Home Purchase

This post reviewed some of the major considerations for determining the cost of buying a home. That starts with how much house you need. The sky is the limit with wants. So, understanding your wants and needs is vital. You may need to make compromises when you figure out how much you can afford. The best way to do that is through a cash flow analysis rather than a rule of thumb. Document your consideration of wants, needs, and affordability in writing. It will help ground you before you start looking, especially when sales tactics and emotions are heavy.

Saving for a house down payment is a major endeavor. While you’ll have to reconsider the details close to your purchase date, the process of planning how to save for that down payment usually starts years earlier. In the next post, I will discuss strategy for saving for the down payment. That includes using the different registered and non-registered accounts to their best advantage and how family gifts may intermingle with that as well.