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5 Mortgage Down Payment Options

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 hereSavvy 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!

handing over keysA 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.

Make Your Mortgage Tax Deductible

Equity Associates Inc. is not affiliated with this strategy. Please speak with your financial advisor for more details.

Convert mortgage interest into tax-deductible interest while increasing your retirement savings at the same time. The Smith Manoeuver achieves this goal. Find out more below:

Although Canada does not allow home-owners to write off their mortgage interest, the government does offer an investment incentive that allows Canadians to turn their mortgage  into tax-deductible debt. Tax deductible means that, at income tax time, you are refunded a portion of the interest paid on your loan. Made popular by Fraser Smith’s book entitled The Smith Manoeuver, this strategy helps ordinary Canadians access tax benefits that, previously, only the rich could afford to take advantage of.

The Smith Manoeuvre is a debt conversion strategy. It steadily converts your mortgage debt into a tax-friendly investment loan, which allows you to increase your assets while making any interest you pay tax-deductible. The result is increased net worth and reduced income tax.

Ninety percent of Canadians feel that they are unable to “get ahead” of their finances. The constant struggle of keeping up with mortgage payments means that the majority of Canadians are unable to build adequate retirement savings. They will rely heavily on government-funded programs that may not be sufficient.

A focus on paying down debt while delaying personal savings means that, by retirement, many Canadians are house-rich and cash-poor. They may have a home without a mortgage but are still struggling to find cash-flow each month. Thus, many are forced to either sell or refinance their homes. By implementing the Smith Manoeuvre strategy now, you allow time and compounding to be on your side so you can avoid such a situation and be financially secure in the future. The common misconception that you should pay your mortgage off first and then invest leaves you years behind those who chose to invest early.

The rich may be getting richer, but rather than complain, we can learn from their methods. -Fraser Smith

In the United States, mortgages are tax-deductible. This means that Americans pay significantly less interest each year on their mortgages. Savvy Americans funnel these savings into their retirement investments, helping them build a solid nest egg. One in fourteen Americans have reached millionaire status and, of those, 90% have taken advantage of this tax incentive in order to accumulate their wealth. Although Canadians’ mortgages are not directly tax-deductible, the Smith Manoeuvre allows us to have the same benefits.

It is projected that the number of Canadian millionaires is expected to rise 32% by the year 2020. With sound financial advice and strategies, it is possible for you to be a part of this club. Better Financial is proud to say that it helps its clients work towards and exceed this goal.

Note: The Smith Manoeuvre strategy must meet guidelines set by the Canada Revenue Agency. It is important that you work with a professional who is familiar with these guidelines and works within them to ensure that you are in-line with Canadian tax laws.

Contact us today for more information about implementing the Smith Manouvre.

  • Pay off your home sooner
  • Convert your mortgage interest into tax-deductible interest
  • Receive yearly tax refunds
  • Start compounding your savings earlier
  • Build your wealth