House buying in Canada is not complex if you know the right mortgage down payment sources.
Statistics have shown that most first-time homebuyers are losing their ability to buy a house, given the increasing cost of living, falling median income and rising house prices.
But it would be rather unfortunate to give up on your home ownership dream when there are several mortgages down payment sources you can use to buy your first or next house.
Here are the top 15 mortgage down payment sources we see most lenders accept from their top clients.
The 15 Mortgage Down Payment Sources For Easier Home Buying
1: Accumulated Savings
Accumulated Savings is the easiest and least expensive down payment source.
This is the money you save over time. This money is not borrowed or gifted. Your accumulated savings show that you are financially responsible.
2: Gifted Funds
Gifted funds are financial assistance from immediate family members, such as parents, siblings, and grandparents, to help buy a house.
A gifted fund is not a loan. Your donor (parents, siblings, and grandparents) will have to sign a gift letter acknowledging that you are not required to pay back your money.
How much down payment can be gifted will depend on the specific lender’s guidelines.
Some lenders are okay with all of the required down payments being gifted to you, while others have a limit on how much can be gifted.
Your mortgage broker should advise you on the specific gifted down payment policies for each lender you consider submitting your application.
A gifted down payment is typical for first-time homebuyers, as recent graduates with little to no accumulated savings
There is no standard format for a gift letter.
Most gift letters will have the following;
• The full name, address, and contact details of the donor(s)
• Your full name and address
• The donor’s relationship with you
• The dollar amount gifted
• The bank account details where the money is coming from
• The donor’s signature
Accompanying the signed gift letter will be a copy of your bank statement showing the amount gifted to you.
3: Sales of Existing Property
Proceeds from selling your existing property are another good down payment source.
Lenders love this form of down payment source because of its simplicity and minimal risk.
Be prepared to provide the following documents if you use this source for your down payment.
- A fully executed Purchase and Sale Agreement for your existing property – buyer details, real estate agent, and sale amount.
- The current mortgage statement states the outstanding mortgage balance.
- If the sale is completed, a signed Trust Ledger from your lawyer will state the total amount you were paid.
- If the funds do not help In-Trust by your lawyer, you must provide copies of your bank statement showing when the funds were deposited into your account.
4: Borrow Against Existing Assets
You may choose not to sell your existing tangible assets and borrow money against them. This process is called Home Equity Financing.
You can use different types of Home Equity Loans to access the equity in your home.
Some loan programs include a Home Line of Credit, Second Mortgage Loan, Equity Loan, and full mortgage refinance.
5: Investment in Securities
If you are into Bitcoin, Mutual Funds, Segregated Funds, or just stock or bond investments, cashing out on your investment can help you put down funds for your new home purchase.
Just like with any other source of down payment, be sure to funnel your mortgage lender the last 90 days’ transaction history of your account.
Your lender may also want to see proof when you redeem the investments.
6: Registered Retirement Savings Plan (RRSP)
Given its tax benefits to first-time homebuyers, you’ve likely heard of this down payment source.
If you’re a first-time homebuyer, the Canadian Government allows you to withdraw up to $35,000.00 and $70,000 for a couple.
From your RRSP account, tax-free, to use as the down payment for a qualifying home.
Under the Canadian Government’s Home Buyer Plan (HBP), a first-time homebuyer is someone who has not owned a house in the four years before purchasing the subject property.
You and your spouse can qualify for up to $70,000.00 if you are a first-time homebuyer.
“The essence of the Federal Government RRSP HBP is to help Canadians buy homes without permanently damaging their retirement savings,” says Rob Carrick with the Globe & Mail
You’re loaning this money from your retirement savings.
Therefore, the Government expects you to pay back this money into your retirement savings plan within 15 years.
7: Tax-Free Savings Account (TFSA)
If you don’t want the pressure to repay whatever amount you withdraw from your RRSP in the 15 years but still want to enjoy first-time homebuyer benefits, then the Tax-Free Savings Account (TFSA) is your best choice to save for your down payment.
You can contribute up to $5,000.00 annually and pay no taxes on any gain or investment generated with the TFSA plan.
The main drawback of the TFSA is the non-tax deduction.
You don’t get a tax deduction when you contribute money to your TFSA.
You get freedom from the rigid requirements for repaying the money withdrawn from an RRSP to pay for a house.
8: Insurance Settlement
Insurance settlement claims can come in big sometimes.
Buying a house with money from an insurance claim is an excellent investment method.
You’ll be required to provide the insurance claim award letter and any supporting documentation needed to satisfy the source of the money.
9: Inheritance
If you’ve never thought of this, you can use inherited funds to help with your home purchase.
Ask your Lawyer or the estate’s Executor to provide you with the ‘Execution of Estate’ document to confirm the source of the funds.
The document will tell the mortgage lender how much you received from the estate.
As with any other sources of down payment money, mortgage lenders are required to validate the legitimacy of the funds.
It’s part of the Anti-Money Laundry requirements lenders have to fulfil.
There is no limit to how much money you can put towards your down payment from your inheritance.
10: Divorce/Separation Settlement
Divorce often involves selling joint assets like real estate. Divorce or separation settlement is another way to generate money for your new home purchase.
The joint real estate must not be sold only to access built-in equity.
One partner can buy out the other partner by refinancing the property to cash out on the equity.
11: Secondary Financing
Instead of going for a high-risk loan, you should consider getting another mortgage loan on your existing property. This can be a second or a third mortgage.
As long as the lender is willing to give you upfront cash against your house, it will help you purchase your new property.
With the tightening mortgage regulations, the maximum combined mortgage loans you can get will not exceed 80% of the property’s current value.
For example, let’s say your property is valued at $500,000.00, and you have an existing loan with RBC for $350,000.00.
The current loan-to-value ratio on this property is 70.00%.
The maximum amount you can borrow against this property is $50,000.00.
The existing $350,000.00 with RBC and the new $50,000.00 second mortgage loan will bring your total mortgage loan secured against the property to $400,000.00, which is 80.00% of the property’s market value.
12: Unsecured Line of Credits
An unsecured line of credit is an excellent source if you don’t want to go through the headache of a second mortgage loan or a HELOC.
Your income should support the required monthly payments of the unsecured line of credit and your new mortgage loan.
One drawback of most unsecured trades is their high interest rate compared to loans secured against real estate.
The high interest rate translates to high payments.
Buying a new house is a dream, but you don’t want to over-stress your financing.
Otherwise, reality may kick in. Instead of enjoying your new home, you may be faced with sleepless nights thinking about how to pay the debts used to purchase the house.
Your mortgage broker should be able to advise you on the best option to take with your home purchase.
13: Affordable Housing Grants
A home buyer grant is more common than you may think. Sadly, most homebuyers are not using this cheap down payment financing.
Most of these grants are used as an incentive to attract people to specific communities.
Therefore, you should check if the city or municipality you plan to buy your house in offers homebuyer grants.
For example;
The City of Brantford
The City of Brantford offers its first-time homebuyer program called the B-Home First-Time Homebuyer Program.
The city provides a 20-year forgivable loan at a maximum of $16,710.00 or 5% of the property value.
The City of Kingston
The City of Kingston has a good home grant program for low-income earners.
If your family income is $84,800.00 or less and the home price is less than $300,000.00, you can qualify for up to $15,000.00 or 5% of the purchase.
Check the qualification criteria if you have to apply for any homebuyer grant program.
14: Employer Grants
For example, employer relocation grants.
Some employers will provide financial assistance to help purchase a new property.
This may not be uncommon in cities like Vancouver, Montreal, and Toronto, where skyrocketing home prices or the relocation to a new town for work are common.
15: Foreign Funds
In Canada and mortgage underwriting lingua, foreign funds are money outside Canada.
If you’re using foreign funds for your down payment, be prepared for high scrutiny because of all the anti-money laundry concerns.
Some lenders stay away from this source of down payment because of the high Anti-Money Laundry risk.
Regulators can easily find lenders for failing to comply with the AML regulations.
Conclusion
Each lender has its policy down payment.
The down payment policy outlines the qualifications and restrictions for use.
You can use a combination of the above sources. However, the more sources used for a single purchase, the higher the lender’s perceived risk.
The risk may or may not impact your interest rate.
It merely means that your file will undergo extra scrutiny, which may result in delays and further documentation requests from your lender.
