So, you want to buy a house?
Do you have a down payment?
What is a down payment?
A down payment is a lump sum amount of money that is put down by a home buyer to secure the purchase of a home when a mortgage is being used to finance that transaction. The down payment shows the mortgage lender that there is a personal investment in the home and helps judge the financial security of the deal.
How much is a down payment?
A down payment is usually 5% to 20% of the purchase price of the home (confirmed by a Purchase Agreement). Five percent is the minimum amount that someone can put down on a purchase, as per legislation from the Canadian government. Down payments above and below 20% are treated differently and are subject to different rules and fees.
Where can a down payment come from?
The money that goes towards your down payment can come from a few places;
- your savings (RRSPs, TFSAs, Investments),
- a gift from family member
- an existing Home Equity Line of Credit (secured onto a property)
- borrowed through a loan or line of credit (special program that comes with slightly higher qualifying details)
If the money is coming from your savings account, you will need to prove you have had the money in your account for a reasonable amount of time (typically 90 days) using a few bank statements that are easily acquired through your branch or your online banking profile.
If using your RRSPs under the FTHB Plan, keep in mind that there are some limits as to how much you can withdraw from that account. For example, you can only use a maximum of $35,000 of your RRSP savings towards the down payment of a house.
If you are being gifted money, a ‘gift letter’ will be required by the lender to confirm that the money is coming from the stated source and everyone understands the terms of that gift. There is no maximum amount that can be gifted; however, it must come from an immediate family member.
When is a down payment actually paid?
The amount of the down payment is due on the day that the purchase is finalized, minus any deposits provided at time of purchase offer. A lawyer will typically facilitate the transfer of those funds from you and your bank to the mortgage lender at that time.
What is the difference between a down payment and a deposit?
A deposit is a lump sum of money that is paid to confirm an offer on a house. You can think of this payment as an offer of good faith to show you are serious about your offer and ready to commit to the process of purchasing that property. It is paid when the offer is accepted by the seller but before the purchase and any outstanding conditions have been met. For example, you might put down a deposit with an offer of $300,000 on a home, but the finalization of that purchase is conditional on you receiving the results of a home safety inspection. The deposit goes towards your down payment. Meaning when you actually pay your down payment, it will be the % of the value of your home dictated by your mortgage, minus the amount you have already paid on for your deposit.
How much should a down payment be?
As previously stated, you need to have at least 5% of your purchase price – so that is a good place to start. Once you feel comfortable you are above that, you can start weighing the pros and cons of going higher. If you are lucky enough to have the flexibility where you are choosing how much to put down, you should be considering the above points. It is important not to put everything you have into your down payment. Having room for a rainy-day fund or future financial milestones is not something to forget about. The most impact the amount will have is if you are considering putting more or less than 20% down.
Down payments less than 20%
- Purchase a home faster instead of waiting to save for a larger down payment
- More money to use for other things (investing, future purchases, unexpected costs, etc.)
- You must pay the additional cost of mortgage default insurance premiums
- Qualify for lower mortgage rates
Down payments more than 20%
- You may be stuck renting for longer while you wait to save over 20%
- Smaller monthly payments
- You have more equity in your home
- Access to 30-year amortizations
The best way to get started on your home buying journey is to talk to professionals who provide accessible and trustworthy service. That way, you know you have the guidance you need to make the right decision for you.