Finding the Downpayment for your First Home
In our previous post on the First-Time Home Buyer Incentive Plan (FTHBI), we looked at how the program could help first-time homebuyers with their monthly mortgage payments by increasing the amount for a down payment. It sounds promising but you still need to have the money available for your portion of the down payment.
DO I ACTUALLY NEED A DOWN PAYMENT?
Yes, you need a down payment to buy a home. Unless you’re one of the lucky few to be able to buy a home outright. However, most first-time homebuyers typically need to borrow money in the form of a mortgage.
A down payment will minimize the amount you borrow from the bank. The bigger the down payment, the less you have to borrow, which means paying less principal and less interest over time. The minimum amount you need for a down payment is based on the purchase price of your home.
COMMON SOURCES OF A DOWN PAYMENT
The most common sources of down payments come from the following.
Registered Retirement Savings Plans (RRSP): The federal government allows first-time homebuyers to use up to $35,000 in RRSPs per person, or $70,000 per couple, on a down payment for your first home. If you pay back the RRSP within 15 years, you won’t be taxed on the withdrawal.
Regular savings: If you’ve pinched your pennies and have enough saved from work bonuses and tax refunds, you can use this money for your down payment. Another strategy is putting money aside each month like you’re already paying a mortgage. You will need to provide a three-month paper trail of your deposits. You may need to explain larger than average deposits, like if you sold your car and deposited the profit.
Gifts from family: In GenWorth’s 2019 First-time Homeownership Study, 37 percent of first-time buyers had their parents, grandparents or other family members gift money for a down payment. There should be no strings attached, for anyone, on money that is considered a gift. Make sure you also get a gift letter signed by your family member to confirm that the funds are a true gift and not a loan. Gifted funds need to be in your bank account 15 days before the sale closes, and be sure to keep a transaction record of the gift.
If you’re interested in the FTHBI plan, your portion of the down payment can only come from the above traditional sources. But, what if RRSPs or savings aren’t an option for you?
BORROWING FOR A DOWN PAYMENT
Before we look at a less common way of getting that down payment for your first home, we need to stress that you should talk to a mortgage broker before making a down payment strategy. Most often, we are going to recommend using traditional sources, discussing the pros and cons of each source. But, there are instances where borrowing money for your down payment can work.
The Cash Equity/Borrowed Down Payment Program, used by Genworth, one of Canada’s three mortgage insurers, allows first-time buyers to borrow money from an unsecured loan or line of credit for their down payment. The program sounds like the golden key, but as with all things good on paper, you must read the fine print.
If you’re borrowing funds, this debt payment is included in your qualifying ratios as you now have more debt to pay with the same income amount. If these ratios are too high, your lending options are limited. This is where a mortgage broker can play with the math to see if it can work and recommend you to professionals who put these types of loans together.
WHAT METHOD IS BEST FOR YOU?
Once again, our favourite answer: it depends. If you know you won’t be able to save enough for a down payment soon, then borrowing the money may be an option. If you have socked away your cash in RRSPs or a savings account and you are looking for the long-term tax benefits, then that might be the best path to take.
Our advice is to start asking questions. Our job is to filter through the options for you and come up with a plan to get you into your first home.