How Much Down Payment Do I Need?
One of the most common areas for confusion it seems in the home buying world is the question of "How much down payment do I need?" This is undoubtedly made more confusing by various advertisements of '0% down' and '100% financing' as well as the countless scenarios in which the minimum doesn't really apply.
First off - to set the record straight - there is no such thing as 0% down or 100% financing. There WAS prior to the financial crash in 2008 (for more details on that read my blog post on the Stress Test) but any advertisements suggesting this option now is merely a slightly misleading way of advertising what is now called the Flex Down program. I will delve more into that a little later in this post, but let's go through some of the basics to start with.
In Canada, the minimum down payment for a conventional purchase is 20%. Lenders and the Government, however, both understand that saving 20% down payment can be an insurmountable feat for most of the population, so they came up with a program to allow mortgages to be insured - for a fee - for clients with less than 20% down in order to get them into a home faster.
This is likely where you may have heard the term CMHC before - The Canadian Mortgage and Housing Corporation is a Crown Corporation that was established to help ease the financial burden of getting into a home. There are actually 3 mortgage insurance companies in Canada: CMHC, Genworth and Canada Guaranty. These companies insure YOU as a borrower for the bank. This means (In a very short explanation), that if you default on your mortgage, go into foreclosure and the house does not sell for enough money to cover the debt owing on it - the insurer will pay the difference to the lender so the lender does not lose money.
As a result of the reduced amount of risk to the bank, they reward insured files with the lowest interest rates on the market but buyers do need to pay the mortgage default insurance premium and qualify at an insurer. This is a 1 time lump sum fee that is tacked onto the borrowed amount of your mortgage.
The minimum down payment for an owner occupied home under the insured program is 5%. Mortgage default insurance premiums are pro-rated depending on how much down payment you have so the more you put down, the lower the premium.
Of course, as with any program, there are limitations. The minimum 5% down rule applies only to owner occupied homes and there are stipulations about the condition of the home, amount of land associated with it etc.
Even with 20% down, you may run into scenarios where lenders want higher down payment depending on location, land size, use etc. Rental properties, farms, commercial properties, fixer uppers, former foreclosures, recreational properties, bare land, condo's with poor condo board history, properties with known issues that have not been addressed - the list goes on.
Don't have 5% down payment sitting in your bank account collecting dust? Don't worry - there are a few options in place to obtain your down payment!
RRSP - The Federal Government announced in the March 2019 budget that they are increasing the amount you can withdraw from an RRSP under the First Time Home Buyer Plan from $25,000 to $35,000. So if you are lucky to have a healthy RRSP in the bank you can take advantage of this option. As a first time buyer you can withdraw RRSP money for the down payment without needing to pay the tax on it as long as you repay the money within 15 years.
If you are not a first time buyer, you can still withdraw from your RRSP, you will just simply be taxed on it in the year you withdraw.
It should also be noted, that a person can qualify under the FTHB plan more than once - you simply need to be off the mortgage and title of a property for at least 4 years prior to using the program again.
Gift - Your parents, siblings or immediate family members are able to gift you all or some of the down payment. If you are buying a property from them, they can also gift you equity in the home towards the down payment. (Your spouse will not qualify to gift to you! They will need to be on the mortgage as well if you plan to use their money.)
Flex- Down - For buyers with good credit, you may be eligible to borrow the down payment under the flex down program. This is where you would borrow the required funds off of a line of credit or personal loan. Typically this would work for those who have most of the down payment saved, but need a little bit extra to get to the minimum for the property. The only stipulation is that we need to be able to debt service the borrowed money into your debt ratios so this does not work for those looking to buy at the top end of their price range and consequently, the more you borrow for down payment, the lower your maximum loan amount will be. You will also want to consider the extra loan payment into your monthly affordability when determining just how much you can afford to spend.
Equity Take Out - For buyers with additional properties, it may be possible to refinance those properties to pull equity from them to use for your new purchase. This is particularly helpful for those with rental properties or who want to turn their current owner occupied home into a rental after they buy a new one. depending on location and the type of property, you would be required to keep a minimum of 20% equity stake in the property but could pull out any extra equity in order to add to or use as your down payment.
No 2 scenarios are the same for every applicant, so if you are curious about your personal options, call your favorite mortgage broker and have a chat about what works for you!
If you have questions about whether any of these options will work for you, or just how much down payment you might need for the home you want, give me a call to discuss!