What You Need To Know About Down Payment and Tax Credits

The down payment is the money the buyer puts toward the purchase of the home. The rule prohibits borrowing money from a lender. The money must come from the personal resources of the buyer — mainly savings or investment. Buyers may also accept a “gift” or borrow money from another party to apply toward the down payment.

Many mortgage lenders require applicants to provide proof of down payment sources. When using personal resources for your down payment, deposit the money in a savings account. Leave it untouched for three to six months. The lender may still require proof of source of funds when you transfer money or make a large deposit.

Besides confirming your ability to make the down payment, you will also have to prove you have the 1.5 to 6 per cent of the purchase price required to cover closing costs. The amount of the down payment you make determines if you qualify for a conventional mortgage or high-ratio mortgage.

• A conventional mortgage only applies when the amount of the loan does not exceed 80 per cent of the purchase price of the home or an 80 per cent loan-to-value ratio (LTV). The down payment amount is a minimum of 20 per cent. For a $400,000 home, the buyer needs to make an $80,000 down payment.
• A high-ratio mortgage pertains to transactions with a down payment of less than 20 per cent of the total purchase price. Federal Laws require the buyer to purchase mortgage insurance, which provides protection against defaults.

The amount of the down payment varies according to the type of mortgage. Generally, expect to need a down payment equal to 5 to 20 per cent of the purchase price of the home. A conventional mortgage requires a minimum of 20 per cent of the appraised value or purchase price of the home — whichever constitutes the lesser amount.

Home buyers who do not have the resources to come up with 20 per cent can elect to obtain a high-ratio mortgage. The high-ratio mortgage enables a home buyer to as little as 5 per cent down payment. However, the borrowers must also buy purchase default insurance.

Regardless of the type of mortgage — conventional or high-ratio — it works to the borrower’s benefit to put down as high a down payment as possible. A higher down payment lowers the monthly payment and reduces the amount of interest paid over the life of the loan.

High-Ratio Mortgage Insurance

Home buyers can calculate a maximum of 32 per cent of the gross family income for housing costs, which includes mortgage principle, interest, property taxes, and heating expenses. Underwriting rule prohibits a home buyer’s total debt load or obligations from exceeding 40 per cent of the gross family income.

Lenders charge buyers a premium for mortgage loan insurance. The amount of the premium depends on the down payment and the amount of the mortgage loan. Buyers have the option of making a lump-sum payment or having the cost included in the monthly payments. The premium ranges from 1 per cent to 4.5 per cent of the mortgage amount.

The RSP Home Buyers’ Plan

Eligible first-time homebuyers might be able to fund their down payment through the registered retirement savings plan (RRSP) Home Buyers’ Plan (HBP). HBP allows the buyer to withdraw up to $25,000 from an RRSP to purchase their first home. You must adhere to the conditions listed below to avoid any financial penalties for withdrawing funds.

• Repayment of the withdrawal within 15 years
• Repay an annual minimum 1/15th of the amount withdrawn, or $1,333 if withdrawing the full $25,000
• Pay taxes on any balance (of the required payment) not made for the particular year

Go to Canada Customs and Revenue Agency Publication to find out more information on HBP.

Discuss the down payment with your bank or mortgage broker to ensure that you have the resources necessary. Once you find out how much of a mortgage you qualify for, evaluate your options and decide on a down payment accordingly.

No Down Payment Programs

If you have excellent credit and a permanent job with an employer but do not have the funds necessary for a down payment, you might qualify for a “No Down Payment” mortgage program. The bank finances 95 per cent of the home’s purchase price and provides 5 per cent cash back at the closing. The borrower must pay the closing costs upfront. If you select this option, expect the lender to charge you a higher interest rate for your mortgage.

Note: The mortgage options discussed above refer to a home purchased as the buyer’s primary residence. Down payment requirements for the purchase of multi-unit properties or investment properties might differ.