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Down Payment

What is a down payment?

Very few homebuyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage. However, even with a mortgage, you will need to raise the money for a down payment.

The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting.

The larger the down payment, the less your home costs in the end. With a smaller mortgage, interest costs will be lower and over time, this will add up to significant savings.

How much do I need for a down payment?

According to the recent Federal Legislative guidelines coming into effect October 15, 2008, one must have a minimum down payment of at least 5% of the total cost of the prospective property. With a down payment between 5 - 19.99%, one's mortgage is deemed "high-ratio". A high ratio mortgage is subject to an insurance premium from one of the three insurance providers in Canada who are CMHC, Genworth Financial, and AIG United Guaranty that all adhere to the following schedule:

With a down payment of 20% or greater, the mortgage is deemed "conventional". A conventional mortgage is not subject to any insurer's fees. Thus, a larger down payment represents a two-fold advantage to the prospective homebuyer. First, the prospective homebuyer will avoid insurance premiums with 20% down payment. Secondly, a larger down payment will relate into smaller monthly payments, or a shorter amortization; both of which lead to interest savings over the life of the mortgage.

What is the minimum down payment needed for a home?

Typically the minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions.

In some instances you can borrow your down payment or the lender will lend you the money in order to meet the minimum requirement of 5% down payment.

Can I use gift funds as a down payment?

Most lenders will accept down payment funds that are gifted from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are true gift and not a loan. Mortgages with less than 20% down must have mortgage loan insurance provided by CMHC, Genworth, or AIG.

How can you use your RRSP to help you buy your first home?

Today, about 50% of first-time homebuyers use their RRSP savings to help finance a down payment. With the federal government's Home Buyers' Plan (HBP), you can use up to $20,000 in RRSP savings ($40,000 for a couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP.

To qualify, the RRSP funds you are using must be on deposit for at least 90 days. You will also need a signed agreement to buy a qualifying home.

Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyers' Plan. For example, if you had already saved $20,000 for a down payment - and assuming you still had enough "contribution room" in your RRSP for a contribution of that amount you could move your savings into a registered investment at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers' Plan.

The advantage? Your $20,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.

While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.

What is a deposit?

A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor's agent, lawyer or notary until the closing of the transaction.