Downpayment Options

Your downpayment refers to the initial payment you make

when buying a property through mortgage financing. A

downpayment is always required when purchasing, because in

Canada, lenders are only allowed to lend up to 95% of the

property value, leaving you with the need to come up with at

least 5% for a downpayment.


In fact, securing mortgage financing with anything less than

20% down is only made possible through mortgage default

insurance. Canada has three default insurance providers: the

Canadian Mortgage and Housing Corporation (CMHC), Sagen

(formerly Genworth Canada), and Canada Guaranty. There is a

cost for default insurance which is usually rolled into the total

mortgage amount and is tiered depending on how much you

put down.


As your downpayment can be a significant amount of money,

you probably need a plan to put this money together. So, let’s

take a look at some of the options you have to come up with a

downpayment.


Money from your resources


If you’ve been saving money and have accumulated the funds

and set them aside for to use for your downpayment, you'll

need to prove a 90-day history of those funds. As far as the

lender is concerned, this is the most straightforward way to

prove a downpayment.


Any large deposits to your bank account that aren’t from

payroll will require you to prove the source of funds. For

example, if you recently sold a vehicle, you’ll need to provide

the paperwork as proof of ownership, which corresponds to

your account’s deposit. Or, if you have funds in an investment

account that you’ve transferred over, statements of that

transfer or account would suffice.


You have to prove the source 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 using the

proceeds of that sale as the downpayment from your new

purchase, you can provide the paperwork from that

transaction to substantiate your downpayment.


RRSPs through the Home Buyer’s Plan


Okay, so let’s say you don’t have all the money set aside in your

savings, but you do have cash in your RRSP. Assuming you’re a

first-time homebuyer, you can access the funds from your

RRSP Tax-Free to use as a downpayment.


You’re able to access up to $35k individually or $70k as a

couple. The money has to be paid back over the next 15 years.

If you’d like more information on what this program looks like,

please get in touch.


Gifted downpayment


Now, if you don’t have enough money in your savings, but you

have a family member who is willing to help, they can gift you

funds for your downpayment. With the increased cost of living,

making it harder to save for a downpayment, receiving a gift

from a family member is becoming increasingly commonplace.


Now, to qualify, the gift has to come from an immediate family

member who will sign a gift letter indicating there is no

schedule of repayment and that the gift doesn’t have to be

repaid. Proof that the money has been deposited into your

account is required through bank statements.


Gifted funds can make up part of or the entire amount of

downpayment. For example, if you purchase a property for

$300k and have $10k saved up, your parents can gift you the

remaining $5k to make up the total 5% downpayment.


Borrowed downpayment


Suppose you aren’t fortunate enough to 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.


It’s possible to borrow your downpayment as long as you

include the payments in your debt service ratios. Typically this

is 3% of the outstanding balance.


So there you have it, to qualify for a mortgage, you’ll need to

come up with a downpayment. That can be through your

resources, a property you sold, an RRSP, a gift from a 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!

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