A downpayment is the initial payment you make when you’re buying a property through mortgage financing. A downpayment is always required when buying a home because lenders in Canada are only able to finance up to 95% of the property value. This leaves you with a least 5% down that you need to come up with.
In fact, getting a mortgage through financing with less than 20% down is only made possible through mortgage default insurance. In Canada, there are three default insurance providers: the Canadian Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth Canada), and Canada Guaranty. The cost of the mortgage default insurance is usually added into the total mortgage amount and is tiered depending on the amount of downpayment you put down. For example, it would cost 4% of the total loan amount to borrow up to 95% of the property value with CMHC assuming the mortgage is not portable.
As your downpayment can be a lot of amount of money, you probably need a plan to put this money together. So, let’s look at some of the options you have to come up with a downpayment.
Money from your resources
If you’ve been saving money over time and accumulated the funds to be used for a downpayment in the future, you must provide a 90-day history of those funds. As far as the lender is concerned, this is a straightforward way to prove for a downpayment.
Any large amount of money deposited into your bank account that aren’t from payroll deposits will require you to prove those sources of funds. For example, if you recently sold one of your cars, you’ll need to provide proof of ownership in the form of paperwork, which relates to your account’s deposit. Another example is if you have funds in an investment account that you’ve transferred over to your bank account, statements of that transfer would be sufficient.
You must provide the sources of your downpayment funds to the lender when qualifying for a mortgage to help prevent money laundering.
Funds from the sale of another property
If you’ve recently sold a property and you’re planning on using the proceeds from the sale as a downpayment to a buy new property, you can provide the paperwork from that transaction to verify the sources of your downpayment.
RRSPs through the Home Buyer’s Plan
Okay, so let’s assume that you don’t have funds set aside in your savings, but you do have cash in your RRSP. Assuming that you qualify as a first-time homebuyer, you can access the funds from your RRSP to use as a downpayment without getting taxed. However, your first repayment period doesn’t start until two years later after you withdrew the funds from your RRSP(s). For example, if you withdrew funds in 2022, your first year of repayment will be 2024. If you’d like more information on what this program looks like, please connect with me.
Gifted downpayment
Let’s say that you don’t have enough money in your savings, but you have a family member that does and is willing to help you by gifting you the funds you need for a downpayment. With the increased cost of living, making it harder to save for a downpayment, receiving a gift from your family member is becoming more common.
Now, to use the gift proceeds from an immediate family member for a downpayment, they will have to sign a gift letter which indicates that there are no schedule of repayment and that the gift doesn’t need to be paid back.
Gifted funds can make up part of or the entire amount of downpayment. For example, if you purchase a property for $500k and have $10k saved up, your parents can gift you the remaining $15k to make up the total 5% downpayment.
Borrowed downpayment
Suppose you don’t have a family member who can gift you a downpayment, but you have excellent credit and a high income compared to the amount you’re looking to borrow. In that case, you might qualify to borrow part or all of your downpayment through an insured program called the FlexDown. It’s possible to borrow your downpayment as long as you include the payments in your debt service ratios.
So, there you have it, to qualify for a mortgage, you’ll need to come up with a downpayment. That can be through your own resources, a property or car you sold, an RRSP, a gift from an immediate family member, borrowed funds, or a combination of all five sources.
If you’d like to discuss your downpayment or anything else related to mortgage financing; it’s never too early to start the conversation about getting pre-approved for a mortgage. Please connect anytime. It would be a pleasure to work with you!