As your local Kamloops mortgage broker, I always get questions about down payments. Here is the lowdown on how much you need and how you might get it.
How much do you need?
Not surprisingly, most Canadian homebuyers purchase a property with the absolute minimum down payment. The minimum can vary, so you want to know how it’s calculated.
Will you live in the home? If the house is owner-occupied, you need 5% down for the first $500,000 of the purchase price and 10% for any amount over $500,000 up to $999,999. If the purchase price is $1,000,000 or more, the minimum down is 20% but can be higher depending on the lender.
If you want to avoid the cost of mortgage default insurance, you’ll need at least 20% down. Any down payment of less than 20% of the purchase price requires this insurance, which will be added to your mortgage principal.
Are you buying a rental or recreational property? If it’s not your principal residence, you’ll need 20% down. Genworth and CMHC have a vacation/second home program that allows you to put 5% down, but mortgage default insurance will be required. Rental properties require 20% down.
Are you new to Canada? If you’re a permanent resident, you’ll need the same down payment as a Canadian citizen: 5% for the first $500,000 and 10% after that. If you are a non-permanent resident, you’ll need 10% down. The guidelines around non-Canadian residential purchases are very complicated. Before purchasing a home in Canada, seeking legal advice is recommended.
Smart ways to come up with a down payment
If you’re looking to buy a second home, refinancing your existing home is often the best path to a down payment. A review of your situation is the best starting point.
If you’re saving for your first home, here are some ways to come up with the cash:
- A financial gift. If you’re lucky enough to have financial support from a parent or other blood relative, you’ll need to get a form signed that says the funds are a gift and that you are not required to pay back at any time.
- Your RRSP: You can withdraw up to $35,000 tax-free from your RRSP or $70,000 per couple. The recent federal budget increased this from $25,000 and announced that in 2020, this program will be available to divorced individuals. You will be required to pay the funds back over 15 years.
- TFSA/Investments: If you withdraw from your TFSA to boost your down payment, you can re-contribute, so you never lose your TFSA room. If you haven’t set up a TFSA, then do it today and set it up so the money goes in every month.
- Early inheritance: Many parents and grandparents would instead help their children purchase a home while they’re alive than wait for an inheritance.
- Sell assets, such as a vehicle or jewelry. You need to show three months of bank statements to support your down payment and explain any large deposits.
- Money from outside of Canada: If you’re bringing funds from outside of Canada, you’ll want to have those funds in Canada for at least 30 days before closing, and you’ll need to provide three months of financial history from the original account they came from.
First Home Savings Account (FHSA): Use it to save up to $40,000 for your first home. Contribute tax-free for up to 15 years. Unused contribution room can be carried over to the following year, up to a maximum of $8,000. Potentially reduce your tax bill and carry forward un-deducted contributions indefinitely. Pay no taxes on any investment earnings.
Often, homebuyers are closer than they think to buying their first or next property. Let’s talk today!
