Often when buying a home the first thing that is considered is the down payment. Most people know that they need at least five per cent of the purchase price as a minimum requirement, and 20% in order to avoid CMHC mortgage insurance. However, many people do not realize that there are more places to come up with a down payment than just your savings. Here are a few of the most common.
Savings
The first and most common source of a down payment is a person or a couple’s savings. First you save for the down payment, and then you buy the house – pretty straightforward.
RRSP
The second most common source of a down payment, especially among first time homebuyers is RRSP’s. A first time homebuyer can withdraw up to $25,000 from an RRSP without penalty and interest free, as long as they pay it back over the next 15 years.
Gift
Gifted down payments from an immediate relative are also very common. Gifts most often come from parents who wish to help their children purchase a home. All that is typically required is a gift letter stating that the funds are in fact a gift, and proof that the money was deposited into the recipient’s bank account.
TFSA
TFSA’s are essentially a savings account where the funds grow tax-free. There are certain rules that apply when withdrawing funds from a TFSA, like you can’t redeposit the money until the next calendar year, but they can be a great place to invest money that you are saving for a down payment.
Company Stock Plans
In addition to TFSA’s and RRSP’s, which can often be set up through an employer, company stock plans can also be used to fund a down payment. Many employers who participate in this kind of program have specific programs designed to make home ownership a reality for their employees.
Borrowed
Down payments can be borrowed against both existing assets, like homes or vehicles, or from other sources like unsecured lines of credit. Just make sure that you tell your mortgage professional that you are borrowing the funds so that they can account for it in the application.
Equity Grant
There are organizations out there that provide grants for individuals who meet certain financial and work requirements. While they are often hard to find, they do exist, and can be a very effective way to make a down payment.
If you have questions about how to go about saving for a down payment, give us a call. We are more than happy to help you come up with a strategy.
