Contrary to popular belief, it is not mandatory to make a 20% down payment to buy a home in Canada. With mortgage loan insurance (CMHC, Sagen, Canada Guaranty), it is possible to purchase with only 5 to 15%. By keeping part of your liquidity (e.g., 10% down instead of 20%) to contribute to your RRSP and reinvest the tax refunds, you can build greater long-term net worth—even after accounting for the insurance premium and a slight increase in interest costs.
1) The False Rule of the 20% Down Payment
The belief in the “mandatory 20%” dates back to the era before CMHC (1946), when banks were not insured. Today, thanks to CMHC, Sagen, and Canada Guaranty, a first-time buyer can qualify for homeownership with less than 20% down (sometimes as low as 5%), subject to eligibility.
2) Understanding Mortgage Loan Insurance (Not to Be Confused With)
Purpose: protects the lender (the bank) in case of default, not the borrower.
Not to be confused with:
Mortgage life insurance (pays off balance upon death)
Mortgage disability insurance (covers payments in case of disability)
Indicative premium schedule (as % of insured loan):
5% down payment → 4.00%
10% down payment → 3.10%
15% down payment → 2.80%
The premium is generally added to the mortgage. In Quebec, the 9% tax on this premium must be paid in cash at closing with the notary.
Example: premium $8,370 → tax $753.30 payable at the notary.
3) Numbers in Practice: 10% vs 20% Down Payment
Educational assumptions:
25-year amortization
Canadian calculation method (nominal rates, semi-annual compounding, monthly payments)
Constant rates over 25 years (to isolate the “down payment + RRSP” effect)
Scenario 1 — 10% down (insured loan)
Price: $300,000
Down payment: $30,000
Loan: $270,000 + premium 3.10% = $8,370 → $278,370 financed
Rate: 4.04% (nominal, semi-annual compounding)
Monthly payment: $1,470.32
Total interest (25 yrs): $162,727
Scenario 2 — 20% down (uninsured loan)
Price: $300,000
Down payment: $60,000
Loan: $240,000
Rate: 4.44% (nominal, semi-annual compounding)
Monthly payment: $1,320.34
Total interest (25 yrs): $156,102
Difference in interest over 25 years: the 10% scenario costs about $6,625 more in interest than the 20% scenario.
4) RRSP Strategy with a 10% Down Payment
Choosing 10% instead of 20% leaves you with $30,000 in liquidity. The idea: contribute to your RRSP and reinvest each tax refund to create a snowball effect.
Tax assumptions (Quebec):
Annual income: $115,000
Marginal tax rate: 44.12%
Objective: $10,000 annual contribution until funds are exhausted
Each tax refund (~44.12% of the contribution) is reinvested the following year
Year RRSP contribution Tax refund (44.12% (marginal rate)
Cash remaining at year-end
Year | RRSP Contribution | Tax Refund (44.12%) | Remaining Cash End of Year |
|---|---|---|---|
1 | $10,000 | $4,412 | $20,000 |
2 | $10,000 | $4,412 | $14,412 |
3 | $10,000 | $4,412 | $8,824 |
4 | $10,000 | $4,412 | $3,236 |
5 | $3,236 | $1,427 | $0 |
Total invested over 5 years: $43,236
Total tax refunds received: $19,075
(Refunds fully reinvested until the $30,000 liquidity is used up.)
5) 25-Year Projection at 7% Return
If the $43,236 invested in the RRSP remains invested for 25 years at an average annual return of 7%, the future value is about $235,000.
(For reference: a major North American stock index has historically delivered 7–10% annual nominal returns depending on the period. Future performance is never guaranteed.)
6) Final Comparison: Long-Term Asset Value
After 25 years (simplified constant-rate model):
Strategy | Real Estate Asset (after 25 yrs) | Financial Assets (RRSP) | Total Estimated Value |
|---|---|---|---|
20% down payment | Paid-off home (market value) | $0 | Home only |
10% down + RRSP | Paid-off home (market value) | ≈ $235,000 | Home + $235,000 RRSP |
Reading: despite ≈ $6,625 more in interest, the 10% + RRSP scenario builds substantial long-term financial assets that the 20% scenario does not generate.
7) Strategic Conclusion
20% down: lower interest, no insurance premium… but no parallel financial assets.
10% + RRSP: insurance premium and slightly higher interest, but compensated by about $235,000 in additional financial assets after 25 years, plus the paid-off home.
👉In short: if you can invest your liquidity with discipline (regular RRSP contributions and reinvesting tax refunds), the 10% + RRSP strategy can outperform the 20% down payment in terms of overall net worth.
Useful Notes (Educational & Compliance)
Figures are illustrative (constant rates, 25-year amortization, Canadian mortgage calculation method with semi-annual compounding).
The insurance premium is NOT financed with the mortgage; in Quebec, the 9% tax on the premium is payable at the notary.
Always check your RRSP contribution room, tax situation, and liquidity.
A mortgage broker and, if needed, a financial planner can refine the strategy for your profile.
Interested in a personalized simulation (income, down payments, rates, RRSP capacity) and a tailored plan? Contact Hypotheques.ca. We operate with transparency and integrity, with a single goal: optimizing your wealth while controlling financing costs.
Notice and Recommendations
The strategies presented here are meant to illustrate different approaches to down payments (10% vs 20%), the use of an RRSP for first-time buyers, and mortgage loan insurance management (CMHC, Sagen, Canada Guaranty). They rely on simplified assumptions (25-year amortization, Canadian mortgage calculation method with semi-annual compounding, constant rates) and are provided strictly for informational and educational purposes.
Every financial situation is unique. We strongly recommend validating any decision with qualified professionals such as an accountant, tax specialist, financial planner, or mortgage broker. These experts can analyze your RRSP contribution room, potential tax refunds, financing costs (including the insurance premium and the 9% notary tax in Quebec), and your long-term wealth goals.
Hypotheques.ca operates transparently and highlights optimization strategies (reduced down payment, RRSP investment, projected 7% return, and net worth management). However, we do not replace the personalized advice of a duly certified professional.
