Coming up with a down payment is one of the most difficult parts of the home buying process, and it can also be the least exciting. But it has to be done, so rather than complaining about how long it takes to save, you may as well just figure out the smartest way to do it.
In order to buy a home in Canada, you have to have a minimum of 5 per cent down of the purchase price. Over that amount, you can put down as much money as you want, and any down payment of 20 per cent or more means that you don’t have to pay for private mortgage insurance. Ideally, you’d be able to put as much money as you can toward a down payment without completely draining your available reserves for closing costs and your emergency fund for unexpected events.
If you have followed a timeline with a fairly long trajectory, then you probably have been saving money to buy a home for some time. If you’d planned on using some of your money for a down payment then it should already be liquid; otherwise you’ll have to pull money out of other investment accounts that may have longer settlement periods, meaning that you’ll have to wait for a brief period to get your money. This is another reason why you should start planning for your home purchase far in advance: funds that are earmarked for long-term investments are usually placed in stocks or riskier reserves, while funds that are needed with a shorter period of time are often placed in safer, short-term investments. You can also use guaranteed investment certificates (GICs) and term deposits. GICs are secure investments that are guaranteed to preserve your principal in addition to earning interest at either a fixed or a variable rate, or a combination thereof for a set period of time. Term deposits are similar in that your investment is guaranteed, but they tend to operate on a time frame of months, as opposed to years for GICs. You can choose between cash GICs, where you can pull out your money before the end of the term, and non-redeemable GICs, where you can’t. Like mortgages, however, what you get in flexibility you pay for cashable GICs you pay for with a lower interest rate than you get with a non-redeemable GIC.
You can also get money for your down payment from your tax free savings account (TFSA). You can contribute up to $5,500 per year into your TFSA, and while there isn’t any income tax deduction for your contributions, withdrawals from that account, including income generated from investments, is tax-free. There is no penalty for withdrawing money from your TFSA for your down payment, and you’re not under any timeline to return the money into that account.
Home Buyers’ Plan
More recently, more and more home buyers are taking advantage of the Home Buyers’ Plan, a federal initiative that allows first-time home buyers to borrow money from their individual RRSPs in order to purchase or build a home. In order to be eligible as a first-time buyer, you aren’t allowed have occupied a home that you or your current spouse or common-law partner owned in the four year period prior to withdrawing the funds from your RRSP. (This doesn’t apply if you are helping a related person with a disability buy or build a qualifying home.) Other eligibility requirements include being a resident of Canada and making the home your primary residence within a year of buying or building it.
Through the Home Buyer’s Plan, you are able to borrow up to $25,000 from your account, and if you are being the home with another person(s), you’re each able to withdraw a maximum of $25,000 from each of your accounts. All of the funds, however, have to have been in that account for 90 days before withdrawing them as part of the program.
The danger with the Home Buyer’s Plan is that because you’re borrowing money from yourself, you’re lax with repaying the loan. Loan repayments need to begin within two years, and it’s not enough to just return the money to the account. When it comes time to file your taxes, you have to designate the money as going to repay your RRSP in order to prevent you from getting the tax benefits twice – one when you initially deposited the money, and again when you put it back into the account.
“Evidence suggests that millennials in Canada likely have an added advantage of receiving a little more of a nest egg from their parents for their first home,” according to a 2015 TD Economics Report. “Parents of millennials in Canada have benefited from a near-doubling in the average home price over the last decade. No doubt, some of this wealth and resulting financial wiggle room has been passed down to children.”
Rather than waiting until their death, however, more and more baby boomers are reportedly helping out their millennial children buy homes by giving them a cash gift or an early inheritance. In fact, Shaun Zipursky, senior mortgage planner with Citywide Mortgage Services in Vancouver says that they’ve been seeing young professions come to the table with “a lot of family help, a lot more gifted funds,” sometimes into six-figure territory. Lenders allow gifts to be used for your down payment, but there are a few things that you need to know.
If you’re not self-employed, most lenders will allow you to use any amount of gifted money as a down payment, whether it’s a few hundred dollars or the entire amount. If you go this route, you need to provide a Gift Letter, appropriate documentation that states that the gift is authentic, that the funds were received honestly, and that the amount doesn’t need to be repaid. It needs to be signed by the giver and accompanied by proof that the funds have been transferred into the recipient’s bank account at least 15 days prior to closing. Gifted funds are only accepted if they come from an immediate family member unless you participate in Genworth’s Borrowed Down Payment Program, which allows gifts from non-immediate family members to be used.
Gathering a down payment for a second property, whether it’s a personal vacation home or a rental property, is a bit of a different ball game than it is for buying your primary residence. With rental properties, the idea is to use as little of your money as possible to finance the purchase. Given this, if you’re looking to buy another property, you probably aren’t looking to come up with an additional chunk of money for a down payment on it. But non-owner-occupied properties, lenders are required to ask for a 20% down payment. So what do you do? In this case, it might make sense to pull equity from your home in order to purchase another property. One way of doing this is to open a HELOC on your existing property if you owe less than 80% of the value of your current home.
In this instance, choosing a mortgage broker with experience in investment mortgages is even more important than it may be otherwise. They’ll have access to more lenders who may be flexible when it comes to down payments, including private lenders.
It might take anywhere from six months or six years to save for your down payment, but the home buying process isn’t a race. Once you know that you’re ready to buy a home, start saving for your down payment however you can.
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