From a low/no down payment mortgage to using Registered Retirement Savings Plan (RRSP) as a source of funds for down payment, buying a home has never been easier.
A down payment is the amount of money that you put towards the purchase of a home. The down payment is deducted from the purchase price of your home. The minimum required down payment amount will depend on the property purchase price.
A conventional mortgage requires a down payment of at least 20% and does not require mortgage default insurance.
An insured mortgage requires a down payment of at least 5% and does require a mortgage default insurance, the premium for which can usually be added in the loan amount.
Generally, the minimum down payment has to be your own funds so it's better to save for the down payment. Saving for mortgage down payment can be a challenge for most of the Canadians and with high home price even 5% can be tough.
Let’s understand a few down payment options:-
Save / Invest systematically
It's always better to put as much money as down payment as you can because you save significant interest cost.
Think long term and save as early as you can and try to max out your TFSA contribution
Monthly Savings - $200, Duration – 5 Years, Interest – 2%
Savings ($12,000) + Interest ($7,329) = Total Savings ($12,739)
Monthly Investment in a mutual fund SIP - $200, Duration – 10 Years, Average Return – 5%
Amount Invested ($24,000) + Expected Gain ($7,186) = Expected Amount ($31,186)
All the funds required to be in your account for a minimum period of 90days at the time you apply for the mortgage.
think about setting up automatic withdrawals.
Note: It’s always better to pay off your high interest debt first before you start saving/investment plan.
Gift from family
If you're ready for home ownership, a gift from your immediate family can help you with the down payment. A substantial increase has been seen in the recent past. There are some requirements:-
- Has to come from immediate relative
- A gift that is not required to be paid back
- A signed confirmation letter from the family member
- Lender may ask for the bank statement or copies of withdrawal /deposit slips
A good credit & stable income of the borrower is always very important to prove that you can actually afford this mortgage
First-Time Home Buyer Incentive
If you are a first time home buyer - you may qualify for a interest free shared equity mortgage with the Government of Canada which can help you reduce your monthly mortgage payment without increasing your down payment.
The minimum down payment requirement is 5% to qualify.
The First-Time Home Buyer Incentive can be:
5% of the purchase price of an existing home5% or 10% of the purchase price of a newly constructed home
The repayment is based on the property’s fair market value at the time of repayment and need to repay after 25 years or when you sell the property or at any time without a pre-payment penalty.
Mortgage Default insurance
Mortgage default insurance helps you buy a house with as low as 5% down payment as it protects the mortgage lender in case of a default.
It is not available if the purchase price of the home is $1 million or more.
The insurance premium will depend on your down payment. The bigger is your down payment- the less will be your insurance premium. Mortgage loan insurance premiums range from 0.6% to 4.50% of the loan amount.
There is a one-time premium which generally gets added to the mortgage loan amount.
Borrowed down payment
Saving for a down payment can be a challenge for most of the Canadians.
For a house priced $4,00,000, at 20% down payment you need to have a down payment of $80,000 and even a minimum of 5% is turned out to be $20,000 with mortgage default insurance.
With increasing home prices and low mortgage interest rates it can be a good idea to borrow down payment.
It can also help you save on mortgage default insurance premium and overall mortgage monthly payment but it only make sense if you can afford to make extra monthly payment comfortably.
Borrow / Zero down payment for mortgage is growing every year in Canada.
Line of Credit
Homebuyers can borrow against the line of credit, to come up with the mortgage down payment.
It is kind of loan works like a credit card where you pay interest only on the amount used and you can pay back and borrow the money again
Note:- Excessive borrowing will impact your mortgage approval and put you under the risk of overleveraging.
Personal Loan
A personal loan is an unsecured loan and usually a good credit and stable financial history is required and a high interest rate is charged.
A personal loan to pay for the down payment will affect your mortgage approval.
Note: - Excessive borrowing will impact your mortgage approval and put you under the risk of over leveraging.
Credit Card
Borrowing money from a credit card for the down payment is very risky due to a very high interest rate.
Apart from the borrowed amount from credit card – the interest part is going to be huge.
Note:- Excessive borrowing will impact your mortgage approval and put you under the risk of overleveraging.
RRSP’s
This can be a great source of down payment as it allows first time home buyers to withdraw a tax free $25,000 towards down payment. If you're purchasing with someone who is also a first time homebuyer – both of you can have access to $25,000 of withdrawal (Total $50,000).
Even if you already have enough money for your down payment, it may make sense to access your RRSP savings through the Home Buyers' Plan.
It’s a loan and must be repaid within 15 years.
Note
Budget 2019 increase the HBP withdrawal limit to $35,000. This applies to withdrawals made after March 19, 2019.
Save as much as you can for your down payment. Bigger the down payment, smaller the mortgage is, which can save you thousands of dollars in interest charges. Be sure to factor in the closing costs and save for an emergency fund.
Summary
It’s always better to take time to save up for the down payment but there can be others options for down payments as discussed but make sure to speak with your financial advisor or a licensed mortgage specialist before you decide.
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