The down payment is a critical part of your total mortgage request. In order to access the best available rates, you have to have at least a small down payment – hypotheque.
What are the methods of obtaining a down payment?
There are many different methods to obtain a down payment for your home. There are the standard, usual ones, but there are others that most people dont know about but I have learned about during the many years I have been advising my clients regarding their mortgages. Basically, there are three methods – hypotheque:
A. Your own money
B. A gift from a relative
C. Funds obtained from other people or in a different way
Making a down payment from your own funds
Funds coming from ones own assets are the most common kind of down payment. This means that the down payment comes from the assets of the individuals who are requesting the mortgage and these same individuals will appear on the property title.
Personal savings: Can be made up of funds in your bank account, your investments (non-RRSP-Registered Retirement Savings Plan), and even if applicable from bank accounts of a company you own (taux hypothecaire).
RRSP: It is possible with the HPB (Home Buyers Plan) that the Canadian government initiated in 1990, to use your RRSP as a down payment for the purchase of a home. It is important to know the rules of HPB to make sure you are able to use this method – pret hypothecaire.
Life insurance cash value: There are life insurance contracts that have a savings piece attached to them that permit the policy holder to borrow against the cash value of the policy. These funds can then be used as a down payment on a home – pret hypothecaire.
Refinancing: If you own a property already, you might be able to refinance it and obtain the funds for a down payment on another property purchase. In this case, the down payment is not considered a loan because it is basically your own funds that you are drawing against.
Collateral guarantee: In certain cases, it is possible to use the equity in another property, whether or not it has a mortgage attached to it, to guarantee the purchase of another property. This is a complicated procedure that effectively creates a collateral guarantee on the other property – taux hypothecaire.
Most lenders will insist that the funds are in your possession for at least 90 days prior to depositing them as a down payment on a home. They have this requirement in order to comply with regulations the government has imposed upon them to prevent money laundering.
This all tells us that if you have saved up your money in cash, your lender will have a problem with the down payment for the purchase of property.
A gift as a down payment
It frequently occurs that one receives a gift to be used as a down payment. This is acceptable, provided that the gift comes from a family member (spouse, child, parent, brother, sister, grandparent or sometimes an uncle or aunt) – hypotheque.
This kind of a gift has to be accompanied by a gift letter. This is a letter that explains that the money is a gift and not a loan that has to be repaid. (see this link for a blank gift letter you can use).
Most lenders insist that the gift funds are deposited into the bank account of the purchaser of the property prior to the processing of the loan application.
Down payment from other people or in another manner
Besides ones own money or assets, or a gift from a relative, there are other, less used sources for a down payment on a property:
A bank gift: By this we mean that the bank, in the guise of a no down payment mortgage, is giving you a gift of a down payment. The bank will give you the 5% or less that is required for the down payment. The bank takes into account the fact that it is not your down payment, and the interest rate on the mortgage will be a little higher to reflect this – taux hypothecaire.
A loan: There are certainproducts that are insured by the CMHC that will allow the down payment for a property to come from the proceeds of a loan. This is not a common occurance.
RRSP loan following an HPB: This strategy allows you to have a small down payment even if you do not have any RRSP funds in your assets. You only have to have a RRSP loan for 90 days, which is in turn paid down by the HPB. The new RRSP contribution will yield a tax refund which is then used as a down payment. This strategy operates for those who begin the RRSP loan before February, have already entered into negotiations to buy a home and who foresee buying a house at the end of spring or the beginning of summer, at the latest. I strongly encourage you to contact an RRSP loan specialist.
Sales price balance: In the last few years, there has not been a lot of use of the sales price balance as a down payment tool because the market has been favorable to sellers and they do not need to offer this inducement in order to sell. It consists of the seller lending money to the buyer. A bank will generally accept a down payment that comes from a sales price balance even though it is a loan – hypotheque.
CONCLUSION: The down payment is one of the most important conditions that a lender may have for mortgage loans. There are many strategies to obtain a minimum down payment for your home loan. We would be very pleased to help you plan the down payment for your next purchase.