How Much Is a Down Payment in Alberta? What First-Time Home Buyers Need to Know

When it comes to purchasing a home in Alberta, understanding down payment requirements and exploring strategies for saving can significantly impact your buying power and financial future. Whether you're a first-time buyer or looking to upgrade, knowing the intricacies of down payments will ultimately empower you on your home-buying journey.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Biggest Takeaways

• The minimum down payment in Alberta varies based on property value.
• Aim for a 20% down payment to avoid insurance costs.
• CMHC Mortgage Loan Insurance is required for down payments below 20%.
• Strategies to save include budgeting, using TFSA, and RRSP borrowing.
• Consult a financial advisor to create a personalized savings plan.

What Is a Down Payment?

A down payment on a home is the initial, upfront portion of the total purchase price that a buyer pays out of pocket, which is not covered by the mortgage loan. This payment is a key component of the home-buying process as it directly influences mortgage terms, including the loan amount, mortgage interest rates, and whether mortgage insurance will be required. 

Down payments are typically expressed as a percentage of the property’s total price. For example, a $100,000 down payment on a $500,000 house would be a 20% down payment.

What’s the Minimum Down Payment in Alberta?

The minimum down payment amount varies based on the type of property, lender requirements, and the buyer's financial situation. For example:

• If you pay for mortgage insurance, you may be able to make a down payment as low as 5%
• If you have a poor credit score or unpredictable income, your lender may require a higher down payment, or require you to pay for mortgage insurance even with a 20% down payment
• If you’re buying a luxury property, you may be ineligible for mortgage insurance, making your minimum down payment 20%
• If you're buying an investment property and don't plan to live in it, you'll usually have to pay at least 20% down
• If you're buying a commercial property, lenders may require higher down payments; usually at least 25%

Should You Make a Bigger Down Payment on a House?

A higher down payment often translates to more favourable loan conditions because it indicates the buyer's strong financial commitment to the property, reducing the lender’s risk.

Making a substantial down payment can have several advantages for the homebuyer, such as lower monthly mortgage payments, reduced interest costs over the life of the loan, and possibly avoiding the additional cost of mortgage insurance, which lenders usually require when the down payment is less than 20% of the home's value.

Let’s take an example of buying a home worth $500,000 with a 25-year amortization period and an interest rate of 4.9%. Here’s a snapshot of total mortgage costs with different down payment amounts:

This chart doesn’t take into account changes like paying the premium upfront (eliminating premium interest) or more favourable interest rates with higher down payments.

Moreover, a sizeable down payment may also give buyers a competitive edge in hot housing markets by making their offer more appealing to sellers. It signals to the seller that the buyer is well-prepared and will likely be able to secure their financing without issues.

This upfront investment is an important financial decision—it can impact the affordability and sustainability of the home purchase long-term. As a result, prospective buyers often save for several years to accumulate a substantial down payment.

What is CMHC Mortgage Loan Insurance?

Mortgage loan insurance, also called lender’s mortgage insurance (LMI),  is a crucial component for homebuyers in Canada who are considering down payments below 20%. This insurance protects lenders if you default on your mortgage and is required when your down payment is less than 20%.

With mortgage insurance, you can borrow up to 95% of a home’s value while still retaining a reasonable interest rate on the loan. However, the minimum down payment does change with the home value. CMHC, which stands for Canada Mortgage and Housing Corporation, mandates a minimum down payment of:

• 5% for homes under $500,000
• 5% on the first $500,000 and 10% on the rest for homes between above $500,000 and below $1 million

Mortgage insurance isn’t available for homes worth more than $1 million, so you’ll likely have to pay at least 20% down—$200,000.

How Much is Mortgage Insurance in Alberta?

The insurance premium varies based on the loan-to-value ratio, but it’s usually between 0.6% to 4.5% of the mortgage amount. The higher your down payment, the lower your insurance premium. It’s available even when you pay 20% down; CMHC’s premium cost for an 80% loan-to-value ratio is 2.4%. Paying mortgage insurance when you don’t strictly need to could be valuable if it gets you better interest rates with your lender.

You can pay it as a lump sum or include it in your mortgage payments. However, if you roll it into your mortgage payments, you’ll pay interest on it at the same rate as your mortgage interest.

Insurance premiums in Ontario, Quebec, and Saskatchewan are subject to provincial sales tax, but not in Alberta. If you’re in a province that charges PST, it must be paid upfront, not rolled into the loan amount.

If you’re financing an energy-efficient home or plan to make energy-efficient upgrades, it’s worth asking about partial premium refunds; CMHC insurance offers a 25% premium refund.

Understanding CMHC guidelines and premiums is vital, especially when opting for lower down payments.

How to Save Up for a Down Payment in Alberta

The first step toward saving for a down payment is to create a detailed budget outlining your income and expenses. That way, you can better understand where you can potentially cut back and allocate more funds for the eventual home purchase.

Alberta offers plenty of first-time homebuyer incentives to help make the process easier, so it’s also worth learning more about Tax-Free Savings Accounts and the pros and cons of borrowing from a Registered Retirement Savings Plan to bolster your down payment fund. You can also take advantage of a First Home Savings Account if it aligns with your financial goals.

Create a Home Buying Budget

To effectively budget for a home purchase and save up for a down payment in Alberta, consider your income, expenses, and desired down payment amount. Determine a specific savings goal for your down payment based on your budget and target home price.

Track your expenses closely and make necessary adjustments to increase your savings toward the down payment. To simplify this process, use tools like budgeting apps or spreadsheets to monitor your progress and ensure you stay on course with your savings plan.

For personalized guidance, consider consulting with a financial advisor to create a tailored savings strategy aligned with your financial goals.

TFSA Withdrawals

With the end goal of saving up for a down payment, Tax-Free Savings Account withdrawals can be a tax-efficient strategy to boost your savings effectively.

With the TFSA contribution limit for 2024 set at $7,000, there’s an opportunity to save for your down payment without facing taxes on withdrawals. This tax-free feature makes TFSA withdrawals a smart choice to avoid penalties and fees that could diminish your savings.

Borrowing From RRSP

Borrowing from your Registered Retirement Savings Plan for a down payment offers a tax-efficient strategy to boost your savings.

Under the Home Buyers’ Plan, you can withdraw up to $35,000 tax-free from your RRSP for a first-time home purchase. That said, the withdrawn amount must be repaid within 15 years to avoid tax implications, and there are certain eligibility conditions to follow.

For example, as a first-time home buyer participating in the Home Buyers’ Plan, you would need to occupy the home as your principal place of residence within one year of buying or building it.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Start Saving for a Down Payment

If you’re planning to buy a home in Alberta, try to start saving as early as possible, build up your equity, and ideally avoid insurance costs by aiming for at least a 20% down payment. While the minimum down payment requirements vary based on the situation, aiming for a higher percentage can benefit you in the long run with lower fees and interest.