How most Canadians find money for a down payment

Posted by Justin Havre. on Wednesday, January 20th, 2016 at 5:23pm.

You might not like the answer, but it would seem that most people do it the old-fashioned way. They save their money.

Local mortgage brokers agree that close to 60% of first-time home buyers have saved at least the minimum 5% required to put down on a property, if not more.  That includes using money saved in an RRSP, which first-time home buyers can dip into to help with a down payment.  This program allows people who have never bought property before, to use up to $25,000 from their RRSP without tax penalty.  Of course, if a bigger down payment is required more money can be withdrawn from a registered retirement fund; however any amount over the $25,000 will be taxed.  You are not restricted to taking out the $25,000.  You will just have to pay tax on the amount over and above that.

The other 30% of first time purchasers have been gifted with the money in some manner.  From a direct family member such as parents, siblings, grandparents either as a cash gift or from an inheritance.  There is no penalty or tax implications from using gifted funds as a down payment, but at the time of purchase the bank financing the mortgage will need to see proof of how the funds were obtained.  That includes a letter from the family member gifting the money and in some cases, copies of bank statements showing money coming out of one account and into another.  The path the money took to get into your hands is important.

Could you borrow?

The days of 0% down are long gone, but first time home buyers may want to investigate a program called “Flex Down”.  This program is only for people with really good credit.  It allows people to get a line of credit so they can borrow money for their down payment.  As mentioned, it works for those with good credit because you must qualify not only for the down payment financing but for the mortgage as well.  Not many people are approved for this program because people with excellent credit generally have good financial skills and make saving money a regular habit.  But it might be worth a shot.

Attainable Homes

The City of Calgary oversees a non-profit organization called Attainable Homes Calgary.  Through partnerships with builders, developers, lenders and lawyers, this organization makes it possible for people to purchase a home with just $2,000 of their own money.  Most people when pushed and given sufficient time, can come up with $2,000.  Prospective home buyers must register through the website and complete an intake process plus take mandatory education sessions as part of the journey towards qualifying for this program.  With the benefit of financial counselling, those who may have fallen through the affordable housing cracks can have a shot at home ownership.

Minimum down payments

The very minimum amount required as a down payment is still 5% of the purchase price.  When there is a down payment that is less than 20% of the purchase price, the mortgage must be insured by Canada Mortgage and Housing.  They’ll let you put a 5% down payment on a house that’s under $500,000.  They have recently changed the rules and now, purchases on homes over half a million require more than 5%.  That rate applies to the first $500,000 and goes up exponentially to a million. For example, a $700,000 home would need a 6.4% down payment.  Homes over a million are not insured by CMHC so 20% down at minimum is what’s required.

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