What sources of funds can be used for a mortgage down payment?
When it comes to purchasing a home the mortgage down payment may seem daunting. In most cases a minimum 5% (non-financed) down payment is required.
Saving for a home can be hard, and if you’re in the market for a home quick, it may be impossible to garner the savings in time. Luckily, there are many options to help you come up with your down payment.
Let’s take a closer look at the pros and cons of the various options:
Cash-Back Mortgage Down Payment
Depending on your provincial standards, you may still be eligible for a cash-back down payment mortgage.
Pros
- You will get into a house quickly
- Only need to pay closing costs
Cons
- Some provinces are trying to eliminate this method of borrowing
- Sometimes has higher interest rates
- Higher risk method, unless you have job security. If forced to sell or undergo financial hardship and must break the mortgage, your lender has the right to take back some or all of the initial cash it gave you to purchase your home.
Other Credit Sources
When it comes to sourcing the minimum 5% down payment for your home, one option is borrowing from other credit sources. If you have good credit, you may be eligible for one of the various methods like a line of credit, personal loan, or credit card.
Pros
- You will get into a house quickly
Cons
- More interest to pay on the total purchase of your home
- Your lender may object to this option
Gifted Down Payment
A trend for many young homebuyers, a gifted non-repayable down payment by a close relative (parent, grandparent or sibling) may be deemed as an eligible down payment by their lender. The borrower and giftor must both confirm that the down payment is, in fact, a non-repayable gift.
Pros
- You will get into your house quickly
- You will not have to repay or pay interest on your down payment
Cons
- Due to this method being of higher risk for lenders therefore must be eligible based on their criteria for this method.
RRSP Home Buyers Plan (HBP)
The RRSP Home Buyers Plan is a method designed for first-time homebuyers. The RRSP Home Buyers Plan allows for first-time buyers to withdraw up to $25,000 from their RRSP to put towards a down payment. You repay the funds back in 15 annual instalments.
Pros
- You get into a home quickly
- Borrowing from yourself, rather than an a third party
- It is not calculated into the lender’s debt calculations
Cons
- The HBP payments can be quite high, therefore you must budget for these annual payments on top of your annual contributions.
- High risk for losing tax-deferred investment gains
- Late or unpaid instalments become taxed as income, a notably common occurrence for many HBP participants
Lastly, it is important to note that there are an array of available options for buyers with moderate incomes or unusual financial situations.
If you have questions about alternate sources of funding for your down payment, you can contact us here for a free consultation.