The down payment is arguably the most important piece of the home-buying process. No down payment means no house. So how much of a down payment do you actually need and what are your options?
First Things First
How Much Do I Need?
Recent rule changes created some confusion around this question. Simply put, the minimum required down payment on a typical home purchase is just 5%. However, if you’d like to avoid adding default insurance to your mortgage you’ll need to put down at least 20%. Due to budget constraints, most new home buyers opt for 5-10% down. There are some situations where you may need more than the 5% minimum. These include:
- Owner-Occupied Triplex/4-plex (10%)
- Rental (Not owner-occupied) (20%)
Now that you know how much you need…
What Are My Down Payment Options?
1. Ol’ Fashioned Savings
Perhaps the most desirable and straight-forward source of down payment is your own hard-earned savings. Banks and mortgage lenders will want to see a 90 day history of your account statements as verification.
2. Using RRSPs and the Home Buyer’s Plan
The Federal government allows First Time Buyers to withdraw up to $25,000 from their RRSP without having to pay withholding tax as they normally would on an RRSP redemption. The catch… you must re-contribute these funds to your RRSP over 15 years–starting the second year after your withdrawal. For more on the HBP and other first-time buyer benefits, read here. Savvy Tip: Some strategic first time buyers will invest their “Ol’ Fashioned Savings” into their RRSP account in the year(s) leading up to their purchase. This generates bigger tax refunds which they add to their RRSP, helping accelerate their down payment. They then redeem their original contributions plus refund money using the Home Buyer’s Plan. I recommend speaking with a financial advisor when trying strategies like these.
3. Gifted Down Payment
A cash gift from an immediate family member can be used for your down payment. Generally, the lender will ask for a gift letter confirming the giftor’s relation to you and that the gift is non-repayable. You will also need to provide a bank statement showing that the funds have been deposited to your account.
4. Borrowed Down Payment
Though the default insurers (see above) allow it, many lenders frown upon it. That said, if the rest of your mortgage application looks good (credit history, income, etc) and you just haven’t been able to save a down payment yet, a borrowed down payment may work for you. If you go this route, the lender will need to consider the monthly payments of that loan or line of credit on your mortgage application.
5. Home Equity Line of Credit (HELOC)
If you already own a home with lots of equity, you can choose to secure a line of credit against it and borrow the funds to purchase another property–perhaps a cottage or rental. Using a HELOC is also a “borrowed” down payment; however, since it is secured against your home it is viewed more favourably by lenders.
6. Mix and Match
A down payment does not have to come from one source. Make your mortgage agent’s day and mix it up!
A Quick Note On Closing Costs
It’s very important to remember there are other costs to buying a home. An appraisal, home inspection, land transfer tax, and legal fees are all things to consider. To ensure you have enough money to cover these costs, most mortgage lenders will require you to provide evidence of an extra 1.5%. For example, if you plan to put 5% down, make sure you actually have 6.5% available.
Now that you know how much you have to put down and the different ways you can achieve your down payment, enjoy the excitement that is the home-buying experience!
This post was written by Patrick Briscoe. Patrick is a Mortgage Agent and Financial Advisor serving clients in London and the surrounding area. Feel free to contact him here. The recommendations and opinions expressed are those of Patrick Briscoe and do not necessarily reflect those of Equity Associates Inc. or Real Mortgage Associates Inc., and are not specifically endorsed by Better Financial or Equity Associates Inc or Real Mortgage Associates Inc. This article is not intended to provide individual financial, legal, tax or investment advice bur rather is to be used for information purposes only. Particular investment or trading strategies should be evaluated relative to each individual’s objectives.