Working with a mortgage broker is a different experience than working with a bank specialist. It’s also a different part of the home buying process compared to working with your Realtor. Some people may have never worked with a mortgage broker before and don’t know what to expect. Because of that, there are some questions…Read Article
Securing the Minimum Down Payment for a House in Canada
One of the most important parts of buying a new home is securing the minimum down payment for a house. Some people aren’t sure how much they will need saved and what the mortgage down payment rules are for Canada.
In this article, I will discuss securing the minimum down payment for a house in Canada. I’ll share the options for using a line of credit, getting a gifted down payment or RRSPs for first time home buyers.
What is the minimum down payment for a house?
Let’s start with the basics. The minimum down payment for a house in Canada are as follows:
- If the purchase price is $500,000 or less, then the minimum down payment is 5%.
Example: If the purchase price is $500,000, the down payment required is $25,000.
- If the purchase price is between $500,000 and $999,999, the minimum down payment is 5% on the first $500,000 and 10% on any amount over $500,000.
Example: If the purchase price is $900,000, you would pay $25,000 on the first $500,000 and then an additional $40,000 on the remaining amount. This totals a down payment of $65,000.
- If the purchase price is or more than $1,000,000, the minimum down payment is 20% and can be higher the higher the purchase price goes as lenders have sliding scales over certain price thresholds.
Example: If the purchase price was $1,200,000, the down payment would be $240,000.
These are the base down payment numbers. Every down payment amount is also determined by the lender’s approval. If you have a history of poor credit or another unique situation, they may request a larger down payment.
Down payment as a first time home buyer.
In Canada, there is this program called the Home Buyers Plan. This program allows you to withdraw up to $35,000 tax free from your Registered Retirement Savings Plan (RRSP). This money can then go towards buying your home.
When you withdraw that amount, the Government of Canada requires that you put back the amount that you took out within 15 years. If the full amount isn’t repaid, you will be taxed on the withdrawn funds.
Before you consider taking out your RRSPs, please consider whether or not you’ll be financially able to repay these funds. If you’re looking for more information on this program and being a first time home buyer, please reach out to me. I have a ton of resources that I can share with you.
Getting a gifted down payment.
It’s getting more common for parents and families to gift family members money in order to help purchase a home. Gifting money isn’t as simple as handing the money to the home purchaser and calling it a day. It has to be done correctly to be approved by a lender.
When gifting money for a down payment, the money must come from immediate family members. In some cases you may be able to have a gift from a distant relative like an aunt or cousin, but that is completely up to the lender. If you’re looking to have a distant relative gift you money, please contact me and we can go over if this will be possible.
When gifting a down payment, you can essentially give as much as you want. Most people will put 20% down, so the gift amount is equal to what is required. If you’re looking for more information on gifting money, please read my article “Getting a Gift Letter in 2022- What to Know.”
Using a line of credit for your down payment.
If you’re not able to save your money to secure a down payment and cannot get a gifted down payment, you may be curious if you can use a line of credit for your down payment.
A line of credit works somewhat like a credit card where you can withdraw funds on credit – up to your assigned limit. You’ll pay interest only on the portion that you use and then once the money is paid back, you’re able to borrow that money again and again.
You’re able to use a line of credit to get the money needed for your down payment, however, the money cannot come from the same financial institution/lender that the mortgage is being obtained from.
Because of this, this option should be used with caution in order to reduce risk associated with overleveraging.
If you’re wanting to use a personal loan for your minimum down payment for a house in BC, it could be an option but only if your credit score and financial history are healthy. If you’re considering this way to secure a down payment, it’s critical to note that taking out a personal loan for a down payment will add to your debt and affect debt-to-income ratio, which will make it much tougher to get approved for a mortgage.
This program works best for clients with low debt in comparison to their income. That way the increased debt ratios don’t affect your qualifying amount as much.
When is your down payment due?
Once you have secured your down payment, this is the amount of money that you will pay towards the purchase. The rest of the purchase price will be funded through your mortgage by the bank to be repaid over a period of time.
When the property completes, that is when your down payment amount is due to be paid as well.
Let’s get the process started.
If you’re ready to get your mortgage application off the ground, reach out to me today. We can discuss your situation, how you’re securing your down payment and let’s get you approved! Please call me at 250-826-3111, fill out the contact form on my website or fill out the pre-approval application.
I look forward to speaking to you soon.