Grade by Grade
F. Financial Literacy · Financial Decisions: Interest, Borrowing, Appreciation, Depreciation and Budgets

Down Payments and the Total Cost of a Purchase

F1.3 A1About 65 minutes
Learning goals
  • I can explain what a down payment is and why it lowers the cost of borrowing.
  • I can calculate the loan amount, payment, total interest and total cost for different down payments.
  • I can find the minimum down payment for a home in Canada using the current rules.
  • I can weigh a bigger down payment against keeping savings for emergencies.

Words to know

down payment
Money you pay up front when you buy something with a loan. You borrow only the rest.
loan amount (principal)
Price − down payment (plus any fees or taxes added to the loan).
total cost
Down payment + all loan payments. For a purchase with a loan, total cost = price + total interest (+ fees).
mortgage
A loan used to buy a home. The home is the security for the loan.
amortization period
The total time it will take to pay off a mortgage completely, often 25 years.
mortgage loan insurance
Insurance that protects the lender. In Canada it is usually required when the down payment is less than 20% of the home's price, and its cost is added to the mortgage.

Hook: pay now or pay later?

Maya has saved $8 000 and wants a $28 000 used car (tax included). The dealer offers a loan at 6.9% per year for 60 months. Should Maya put down all $8 000, just $3 000, or nothing at all and keep the savings?

The amount of the down payment is the last of the four things F1.3 asks you to compare (along with rate, time and the way interest is calculated). All prices and rates here are examples.

Why a down payment saves money

A down payment is money you pay at the start. You borrow only what is left:

loan amount = price − down payment

Interest is charged only on what you borrow. A smaller loan means:

  • a smaller monthly payment,
  • less total interest, and
  • sometimes a lower rate, because the lender takes less risk.

The trade-off: money used for a down payment is no longer in your savings for emergencies.

Worked example

Example 1: Maya's three choices

Find the monthly payment, total interest and total cost for a $28 000 car at 6.9% for 60 months with a down payment of $0, $3 000 or $8 000.

  1. Loan amounts: 28 000 − 0 = $28 000; 28 000 − 3 000 = $25 000; 28 000 − 8 000 = $20 000.
  2. Payments (formula from Lesson 4, i = 0.069 ÷ 12, n = 60): $553.11, $493.85 and $395.08.
  3. Total of payments: 553.11 × 60 = $33 186.60; 493.85 × 60 = $29 631.00; 395.08 × 60 = $23 704.80.
  4. Total interest = payments − loan: $5 186.60; $4 631.00; $3 704.80.
  5. Total cost = down payment + payments: $33 186.60; $32 631.00; $31 704.80.

The $8 000 down payment saves $1 481.80 in interest compared with $0 down, and lowers the payment by $158.03 a month.

Down paymentLoanMonthly paymentTotal interestTotal cost
$0$28 000$553.11$5 186.60$33 186.60
$3 000$25 000$493.85$4 631.00$32 631.00
$8 000$20 000$395.08$3 704.80$31 704.80
A $28 000 car at 6.9% for 60 months. Total cost = down payment + 60 payments.
Total cost of a $28 000 car at 6.9% for 60 months05 00010 00015 00020 00025 00030 00035 000$33 187$0 down$32 631$3 000 down$31 705$8 000 downDollarsinterestloan principaldown paymentPrice + interest= total cost
Each bar is the total cost. The price ($28 000) is the same in every bar. Only the interest part shrinks as the down payment grows.

Down payments on a home in Canada

Homes are the biggest purchase most people make, so down payments matter even more. In Canada there are minimum down payment rules. As of 2025 and 2026 they were:

  • Price $500 000 or less: at least 5% of the price.
  • Price over $500 000 and under $1.5 million: 5% of the first $500 000 plus 10% of the part above $500 000.
  • Price $1.5 million or more: at least 20%.

If the down payment is less than 20%, the buyer usually must pay for mortgage loan insurance. Its cost (for example, about 4% of the loan when you put 5% down) is added to the mortgage. Rules and premiums change, so check the Government of Canada's website for current numbers.

Minimum down payment on a $700 000 home (rules as of 2025)first $500 000: 5%next $200 000: 10%0.05 × 500 000 = $25 0000.10 × 200 000 = $20 000Minimum down payment = 25 000 + 20 000 = $45 000(about 6.4% of the price)
The minimum is calculated in two pieces. On a $700 000 home, 5% of the first $500 000 plus 10% of the remaining $200 000 gives $45 000.
Worked example

Example 2: A smaller or larger mortgage

A $500 000 home. Compare a 5% down payment with a 20% down payment. Use an example rate of 5% per year and a 25-year amortization (300 monthly payments). This is simplified: real fixed-rate mortgages in Canada compound twice a year, and we leave out the insurance cost.

  1. 5% down: 0.05 × 500 000 = $25 000, so the mortgage is $475 000. Payment ≈ $2 776.80.
  2. Interest: 2776.80 × 300 − 475 000 = 833 040 − 475 000 = $358 040.
  3. 20% down: 0.20 × 500 000 = $100 000, so the mortgage is $400 000. Payment ≈ $2 338.36.
  4. Interest: 2338.36 × 300 − 400 000 = 701 508 − 400 000 = $301 508.
  5. Difference: 358 040 − 301 508 = $56 532 less interest with 20% down. The buyer with 5% down would also pay mortgage insurance.

The 20% down payment lowers the payment by $438.44 a month and saves about $56 532 in interest over 25 years, but it takes much longer to save $100 000 than $25 000.

Bigger is not always better

A bigger down payment saves interest, but do not empty your savings. Keep an emergency fund (often a few months of expenses) so a surprise cost does not end up on a high-interest credit card. A good plan balances the down payment with a safety cushion.

Hands-on activity

How long to save the down payment?

You need: a real-estate or car website or flyer (with a grown-up), a calculator or spreadsheet.

  1. Find the price of a home or car in or near your community.
  2. Calculate the minimum down payment (home) or a 10% and a 20% down payment (car).
  3. Choose a realistic monthly savings amount for a young adult (for example, $400 or $750).
  4. How many months would it take to save the down payment, ignoring interest? Change the savings amount and see how the time changes.
  5. Talk with a grown-up: what else would you need to save for (moving costs, insurance, closing costs)?

Model answer: a $700 000 home needs at least $45 000 down. At $750 a month: 45 000 ÷ 750 = 60 months, or 5 years. At $400 a month it would take 112.5 months, more than 9 years.

Just for fun

A down payment is the only time a bank is happy to see you put money down.

Your turn

1

Find the minimum down payment on a $400 000 home.

2

Find the minimum down payment on a $700 000 home.

3

Maya puts $3 000 down on the $28 000 car. What is the loan amount?

4

Using the table, how much interest does Maya save with $8 000 down instead of $0 down?

5

A $15 000 loan at 6.9% for 60 months has a payment of $296.31. Find the total interest.

6

Find a 20% down payment on a $35 000 truck, and the loan amount.

7

Explain in one or two sentences why a down payment reduces the total interest.

More practice: warm-up

1

Find 10% of $30 000.

2

A car costs $18 000 and the down payment is $2 000. What is the loan amount?

3

Find 5% of $450 000.

4

Find the minimum down payment on a $1 600 000 home.

5

True or false: a bigger down payment means a smaller loan.

More practice: on your own

1

Maya puts $5 000 down on the $28 000 car (6.9%, 60 months). The payment is $454.34. Find the total interest and total cost.

2

Find the minimum down payment on a $900 000 home and write it as a percent of the price.

3

In Example 2, how much more is the monthly payment with 5% down than with 20% down? How much more is that per year?

4

A couple needs $45 000 for a down payment and can save $750 a month. Ignoring interest, how long will it take?

5

A buyer puts 5% down and the mortgage is $475 000. If mortgage insurance costs 4% of the loan and is added to it, what is the new mortgage amount?

Challenge

1

Maya could put an extra $5 000 down ($28 000 → $23 000 loan, payment $454.34 instead of $553.11) or keep it in savings at 3% compounded yearly for 5 years. Compare the interest saved with the interest earned. What would you advise?

2

Dealer A: $27 000 car, $0 down, 7.9%, 60 months, payment $546.17. Dealer B: $28 000 car, $3 000 down, 4.9%, 60 months, payment $470.64. Which has the lower total cost?

3

Maya wants a payment of at most $450 a month (6.9%, 60 months) on the $28 000 car. What is the smallest down payment that works? Use P = PMT × (1 − (1 + i)⁻ⁿ) ÷ i.

Check your understanding

Quiz

1.

What is a down payment?

2.

What is the minimum down payment on a $300 000 home (rules as of 2025)?

3.

Same price, rate and term, but a bigger down payment. What happens?

4.

A $28 000 car: $8 000 down plus 60 payments of $395.08. What is the total cost?

5.

In Canada, mortgage loan insurance is usually required when the down payment is…

6.

What is the minimum down payment on a $600 000 home (rules as of 2025)?

For parents and teachers

Big idea: F1.3 includes comparing the effect of different amounts of down payments on the overall cost of purchases. Students calculate loan amounts, payments, total interest and total cost, and learn Canada's minimum down payment rules for homes (as of 2025; these rules and mortgage insurance premiums change, so check canada.ca).

Common difficulties:

  • Leaving the down payment out of the total cost. Total cost = down payment + all payments.
  • Applying 10% to the whole price for homes between $500 000 and $1.5 million. The 10% applies only to the part above $500 000.
  • Thinking a bigger down payment is always best. Savings for emergencies matter too.

How to help: If you have bought a car or a home, consider sharing (with rounded numbers) how you decided on the down payment. The mortgage example is simplified: real Canadian fixed-rate mortgages compound semi-annually and include insurance and other costs, so real numbers will differ.