Saving enough money for the down payment on your first home is one of the largest obstacles you’ll face. There are, however, numerous down payment sources and first-time homebuyer programs available to help get you into your own home sooner. And with interest rates at historic lows, now may be the perfect time to make your homeownership dreams come true.
When you have mortgage default insurance, the minimum down payment when buying a home is 5% of the purchase price for a property valued at $500,000 or less and 10% for the portion of the purchase price above $500,000. So, if you plan to buy a home that’s $700,000, for instance, this is your minimum down payment breakdown:
· $500,000 x 5% = $25,000
· $200,000 x 10% = $20,000
· $25,000 + $20,000 = $45,000 Minimum Down Payment
Without mortgage insurance, the minimum down payment would be 20% ($140,000 using the example above). This insurance protects lenders in case you default on your mortgage, and is provided by three companies in Canada – Canada Mortgage and Housing Corporation (CMHC), Sagen (formerly Genworth Financial) and Canada Guaranty.
What are my down payment options?
While budgeting and saving are required to come up with your down payment, there are additional options available – both traditional and non-traditional sources – to offer a boost to your down payment that can get you into a home sooner.
Examples of traditional down payment options include: savings account; investments; RRSPs; non-repayable gift from an immediate family member; and proceeds from the sale of another property.
The available non-traditional down payment methods include: borrowed money (line of credit, credit card, personal loan or family member loan); and lender cash-back incentives.
Non-traditional down payment options are typically only acceptable for use by borrowers with favourable credit and solid repayment history.
It’s also important to note that interest rates are typically higher when opting for non-traditional versus traditional down payment options.
Special programs for first-time homebuyers
There are several incentives and rebates designed specifically for first-time homebuyers to help cover such things as down payment and closing costs – two substantial expenses in the homebuying process.
One popular down payment source includes borrowing from your registered retirement savings plans (RRSPs). Under the Home Buyers’ Plan (HBP), first-time homebuyers can withdraw up to $35,000 from their RRSPs ($70,000 as a couple) for a down payment. This is a tax-free, interest-free loan, where funds must be repaid over 15 years. Another requirement is that the money must be in the RRSP account for a minimum of 90 days prior to being withdrawn for HBP use.
Another program – The First-Time Home Buyer Incentive (FTHBI) – was designed to help ease mortgage costs for first-time homebuyers by reducing monthly payments through shared-equity loans – up to 5% towards the down payment of a resale home and as much as 10% for newly-built homes. The idea is that, by increasing the size of your down payment, the FTHBI reduces monthly mortgage costs, making homeownership more affordable.
Have questions about how you can supplement your down payment savings and get into your own home sooner?
Answers are a call or email away.