When putting a down payment on a house, often people strive for 20% if they can, and anything less is just a fallback if you don’t have the cash. As most people know, if you have less than 20% down your mortgage needs to be insured by the CMHC. The nice thing about CMHC insurance is that you get to pay the premiums but if you default the bank gets the payout.

Premiums increase the less money you have down, and rates have been cranked up recently. Now if you have between 15% and 20% down you’ll pay an extra 2.8% of the mortgage in premiums. 10-15% costs 3.1%, and 5-10% costs 4%. So does that mean it’s always a good idea to put 20% down? Not necessarily. It depends on your mortgage rate, and the return you would get on the money if invested elsewhere (your opportunity cost).

It get’s a bit complicated, so I’ve created a calculator to help out. Check it out.

Optimal Down Payment Calculator

Here’s how it works. To compare the result of different down payments, it assumes that you can afford the highest payment (minimum down) and have the cash for the whole house. Then it compares your net worth after the given time period by taking your investment value and subtracting the mortgage balance. For example, a $500,000 property mortgaged with $25,000 down (5%) at 2.5% will cost you $2213/month. At the same time you invest $475,000 for 5 years. After 5 years you take your investment value and subtract the mortgage balance to get your net result. Now if you put $100,000 (20%) down, it would cost you $1792/month and you have $400,000 to invest. Thus you invest $400,000 + $421/month ($2213-$1792) for 5 years, then subtract the mortgage balance. The summary shows the best outcome and the graph shows every scenario from minimum down to 50%. Note that if investment returns are low as compared to mortgage rates, it will say 50% is the optimal down payment, but of course 100% would be even better.

You will notice that the outcome could change depending on the time period you are comparing. For example, if you put the minimum down and want to be ahead after 5 years, you would have to earn about 5% more in your investments than you are paying on your mortgage to outweigh the 4% CMHC fees. But over 25 years, you only need to earn an extra 2% to make the minimum down payment worthwhile.

Here’s another example. With current fixed rates of about 2.8%, it makes sense to put 20% down if you earn less than 5% in your other investments. If you earn more than 5% (after tax), then it makes sense to put only the minimum down.

Make sense? Could the summary result or the graph be changed to make it clearer?