Saving for a down payment can be the largest struggle a first-time homebuyer will face. Fortunately, there are a number of programs and options available to help get you into your own home sooner and start building equity.
Down payment sources are broken down into two categories: traditional; and non-traditional. There are many choices available today to help you turn your homeownership dreams into reality.
Traditional down payment options
- Non-repayable gift from immediate relative
- Rent-to-own payments above market rent
- Proceeds from sale of another property
Most buyers use savings or investments as the source of their down payments. Typically, lenders will require a 90-day history or statements from your bank to prove the gradual accumulation of assets.
Next are RRSP withdrawals under the Home Buyers’ Plan (HBP). This program enables first-time homebuyers to withdraw up to $25,000 from their RRSPs ($50,000 as a couple) for a down payment.
This is a tax-free, interest-free loan, where funds must be repaid over 15 years (annual payments of one 15th of the total amount are required). Another stipulation is that the funds must be in the RRSP account for a minimum of 90 days prior to being withdrawn for HBP use.
Rounding out the top three most popular down payment sources is a gifted option. Lenders have stringent guidelines in place for this type of down payment. The gift must come from an immediate family member – parents, grandparents, siblings, etc – and it must solely be given as a gift that’s not expected to be paid back.
A gift letter is most often used to confirm the funds are not part of a loan. Confirmation proving that the funds have been deposited into the buyer’s account is also required.
Non-traditional down payment options
- Borrowed funds (line of credit, credit card, personal loan or family member loan)
- Lender cash-back incentives
Non-traditional down payment options are typically only acceptable for use by borrowers with favourable credit and solid repayment history.
As well, repayment of borrowed funds must be included in the total debt service (TDS) calculation. TDS is the percentage of income that’s needed to cover housing costs (principal, interest, taxes and heat), plus any other monthly obligations (payment towards credit cards, lines of credit, personal loans and vehicle financing/leasing).
Lender cash-back is a significant source of non-traditional down payment. The purpose of this program is to assist buyers using a substantial amount of their saved assets to purchase a home, but who would be left with minimal resources to complete the transaction.
So, while this option is not to be directly used as a down payment, it can free up more funds for the down payment by covering out-of-pocket expenses such as closing costs and lawyer/notary fees.
With a cash-back mortgage, a percentage of your mortgage principal is returned to you in a lump sum when your mortgage closes. The most popular cash-back amount is 5%, but different lenders offer cash-back options ranging from 2% to 7%.
The cash-back amount is added to your total mortgage amount and amortized over your term. If you break your mortgage before your term is up, you must pay a designated cash-back mortgage penalty for the remaining term in addition to the standard penalty for refinancing early.
It’s also important to note that rates are typically higher when opting for non-traditional versus traditional down payment options.
Have questions about your down payment options? Answers are just a phone call or email away with one of our commission-free advisor.