For a minimum down payment, you’ll need five per cent of the purchase price of your home, along with high-ratio mortgage insurance. If you can afford to put down more, you can reduce the amount you have to borrow, and how much you have to spend each month on a mortgage payment. Of course, 20 per cent of the price of your home is ideal, as it means you will qualify for a conventional mortgage and mortgage insurance isn’t required.
But the majority of Canadian first-time buyers may not be able to afford such a large mortgage down payment.
In Edmonton, Alta., first-time buyers are generally couples in their 20s and 30s who are looking to spend between $320,000 and $370,000, according to local ReMax Realtor, Peter D. Schalin. He says that first-time buyers generally don’t have the funds to put down more than the minimum five per cent.
Nearly 85 per cent of Alyson Thiessen’s first-time buyer clients have the minimum down payment. Thiessen is a broker with Mortgage Intelligence who resides near Nanaimo, B.C. She says less than one per cent put down the full 20 per cent.
Changing times and house price appreciation are to blame, she says. For instance, when houses could be purchased for $100,000, five per cent was $5,000. Today, five per cent of a standard entry-level home at $300,000 is $15,000. Nowadays, what used to be the 15 per cent down payment is now the five per cent down payment on a house.
Where to get your mortgage down payment
First-time buyers worry less about their down payments than they did a decade ago, according to a Coldwell Banker survey conducted among its brokers and sales representatives in markets across North America. According to 29 per cent of brokers and Realtors surveyed, first-time homebuyers were more concerned with down payments 10 years ago than any other part of the home-buying process, while only 23 per cent said this is their main concern in today’s market.
One of the most common sources of a down payment for first-time buyers is personal savings. In many cases, new homebuyers have saved for this purpose. Assets such as life insurance dividends, a savings bond that’s matured, a holiday bonus from work or an income tax refund will go into a savings account earmarked for a new homeowner’s down payment. Depending on how much you can afford to save, you can take it one step further and put aside what you determine it will cost for a monthly mortgage payment, says Charles Lambert, managing director of mortgages for Scotiabank in Toronto.
Family gifts and inheritances are another common source for first-time buyers’ down payments. Forewarning, your lender will generally require written confirmation, which may include the contact information of the family member providing the gift, to verify that the money doesn’t have to be re-paid.
If you’ve been investing in a tax-free savings account, you may want to withdraw all or part of your down payment from this account. There is no tax on annual earnings and no tax on the withdrawal. If you haven’t opened one, keep in mind you can only contribute $5,500 a year tax-free, but if you contribute less than this, you can carry forward any unused contribution room in case you want to contribute more next year, according to the Bank of Montreal.
Another source of your down payment is your Registered Retirement Savings Plan (RRSP). You can withdraw from this – and not accrue interest – to buy or build your first home. Under the Canada Revenue Agency’s Home Buyers’ Plan you and your spouse or common-law partner can withdraw from your RRSP as long as you pay back the withdrawn amount in 15 years, beginning the second year after the withdrawal. You will be notified by the Canada Revenue Agency when you need to begin repayments. But remember to include this repayment amount in your monthly budget. Keep in mind, if you cannot keep up with your repayment schedule, the amount you did not pay back will become part of your taxable income for the year.
The 2009 federal budget made changes to the Home Buyer’s Plan. Now, you can withdraw $25,000 from your RRSP to purchase or build a home, compared to $20,000 previously. Standard repayment rules apply. With the $5,000-increase to the withdrawal limit, a married or common-law couple purchasing a home jointly with sufficient RRSP funds in each of their names may withdraw up to $50,000 from their RRSP funds toward the purchase of their home. Since the Canada Revenue Agency announced the RRSP withdrawal increase, Gerri Vaughan of Invis in Edmonton, says her clients have been taking advantage of the tax-free funds. She also notes that your RRSP withdrawal can be used for more than just your mortgage down payment, but other related expenses.
Some Realtors and lenders aren’t convinced many first-time buyers will have the investment funds to take full advantage of this option, as it’s uncommon for those buying their first home to have such large investments. Jeff Adessky, a Realtor with Century 21 Vision in Montreal, says only one in 10 first-time buyers in his market are drawing from their RRSPs to make their mortgage down payment. Many first-time buyers have been contributing to their savings accounts instead of contributing to RRSPs in their quest to buy a home, says Joan Dal Bianco, vice-president of real estate secured lending, TD Canada Trust, in Toronto. However, in B.C. and Alberta, Thiessen says that roughly 30 per cent of her clients are using their RRSPs for their down payment. She says she hasn’t noticed an increase in first-time buyers using their RRSPs since the withdrawal increase, but it’s a channel she highly recommends.
How to decide what’s right for you
Deciding how much to put down can be difficult. Some say it’s best to put down as much as you can, while others caution putting down too much.
“In this current environment, people are considering – if they can afford to – putting down more,” says Dal Bianco. However, she notes that a buyer’s market may factor into this decision. “People can get into neighbourhoods they didn’t think they could get into before. They can get into the housing market where most of their payments are going to principal instead of interest when the rates are this low. So I think more people will have to weigh whether they save for a larger down payment or get in while the market’s so great.”
While deciding on the size of your down payment is a personal choice, there are some things you should consider. For instance, calculating how the size of your down payment affects the size of your mortgage payment is important because it affects your personal budget.
The economic downturn has put unforeseen job loss in the minds of many. “With the unemployment rate rising now, if people feel secure in their jobs, I think it’s a fantastic time to get into the housing market,” says Dal Bianco. However, if you aren’t feeling very secure in your current position, Thiessen recommends a smaller down payment and putting that extra money you would have used for your down payment in a savings account.
Regardless of job security, Thiessen says it’s always a good idea to leave a cushion. “You can still get a 35-year amortization, so why not make it as painless as possible for you, especially right now when things are uncertain,” she says, adding a first-time buyer can always use their prepayment privileges.
Having your first child can have an enormous impact on your ability to pay for a mortgage. “Your first child really can knock your financial world apart,” Thiessen says. When a woman goes on maternity leave, or a father goes on paternity leave, their income is significantly reduced. Then, if one parent decides not to go back to work right away, suddenly a two-income household is reduced to one income. “That first year is usually the biggest kick in the pants, financially,” she says.
How the size of your down payment will impact your future savings abilities should also be considered. If your mortgage payments are high, will you be able to save money down the line? Or alternatively, if your down payment is high, will you be dirt poor when you enter your home? It’s important to leave some money in the bank for emergencies or to do some unforeseen work to the house. So make sure costs (closing and moving) as well as potential costs (emergencies, renovations) have been identified at the early stages, says Lambert.
The size of your down payment should be a reflection of what you can afford and your long-term stability. But there’s a reason most first-time buyers put down the minimum five per cent. As Montreal Realtor Adessky says, “If you don’t have the money, you don’t have the money.”
If you’ve got some time before you plan to purchase a home, here are two things you can do now to help you save for a mortgage down payment.
Set up an automatic savings plan
To help save for your minimum down payment and other home purchase-related costs, it’s a good idea to set up an automatic savings plan. This way you can start saving for your home purchase. You can set up automatic payments to withdraw money from your chequing account into a savings account, tax-free savings account or other safe investments, says Lambert.
Develop a game plan
Sitting down with a mortgage specialist long before you look at homes is beneficial because they can help you come up with a strategy and alert you to things you should avoid. “If you sit down with your broker and they say, ‘No you can’t buy that new car.’ You’re not going to buy that new car. But if you buy the new car, and then you see your broker, the bell is rung,” says Thiessen. “When you ring a bell with finance, it’s very hard to un-ring.”
Getting it straight
It’s easy to get confused when it comes to your mortgage down payment and your deposit.
Your deposit is a portion of your down payment and a sign of good faith that you’ll buy the house. It comes in the form of a certified cheque and accompanies your offer to purchase. The amount of the required deposit varies by region and purchase price. You may be asked to submit a smaller initial deposit, usually provided when you’re negotiating the purchase. This is usually about $1,000. However, a larger initial deposit could signal to the seller you’re a serious buyer and give you an edge while bargaining.
Your full deposit is usually required once the conditions of the offer are met, should there be any. It can be as much as five per cent of the purchase price.
The deposit cheque should be made out to your lawyer or notary. If your offer is accepted, the cheque is deposited and held in trust until the deal goes through. Upon closing, the amount is subtracted from your down payment and the rest of the down payment needs to be made.
No Money Down Mortgage / No Down Payment Mortgage / Zero Down Mortgage
Since Septhember 2012, No Money Down Mortgages are no longer available in Canada. The minimum down payment on a house is 5%.
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