And How to Provide Proof of Your own Down Payment Source
So, you’ve found your dream home, put an offer on it, had it accepted, and have been approved for a mortgage. Now, it’s time to pay the down payment. It seems simple enough, but it’s essential to understand that not all sources of down payments are acceptable. So, if you were planning to pay it with a suitcase full of unmarked bills, think again.
We’ll take you through everything you need to know about your mortgage down payment in this blog. Keep scrolling to learn about the mortgage down payment basics:
- What size of down payment is required?
- When are you required to pay mortgage insurance?
- How the size of your down payment affects your mortgage costs
We will also go into detail about each of the acceptable mortgage down payment sources:
- Home Buyers Plan (HBP)
- New Tax-Free First Home Savings Account
- TFSA and Savings
- Gifted down payments
- Borrowed down payment – Credit
- Money from Overseas (Foreign resources)
- Incentives – First Time Home Buyer Incentive or Municipal/Builder Incentives
Let’s get started!
What Size of Down Payment is Required?
The minimum down payment amount required in Canada varies based on the home’s purchase price. The chart below outlines the different down payment amounts for each price bracket.
|Purchase Price of Home||Minimum Down Payment|
|$500,000 or less||5% of the homes purchase price|
|$500,000 to $999,999||5% for the first $500,000 10% for the remainder of the purchase|
|$1,000,000 or greater||20% of the purchase price|
It is important to note that these are just the minimum requirements. If you have poor credit or are self-employed, your lender may require a larger down payment than those shown in the table above.
When are You Required to Pay Mortgage Default Insurance?
Mortgage default insurance protects lenders in the event that you are unable to make your mortgage payments. You must purchase mortgage insurance whenever your down payment is less than 20% of the home’s purchase price.
Mortgage default insurance isn’t available if:
- Your home’s purchase price is $1,000,000 or more.
- Your loan does not meet the standards of the company insuring your remortgage.
How Does Down Payment Size Affect the Cost of Your Mortgage?
The size of your down payment can affect the cost of your mortgage in a few different ways. Here’s how:
Lowers Your Mortgage Amount: This one is pretty self-explanatory. A larger down payment means your mortgage will be smaller.
For example, if you were to purchase a 500,000 home with a 5% downpayment of 25,000, you would require a $475,000 mortgage. If you were to bump the down payment amount to $100,000 (20%), you would only need a $400,000 mortgage, significantly reducing your monthly mortgage costs.
Eliminates the Need for Mortgage Default Insurance: As mentioned above, if you can put a downpayment of 20% of the purchase price of your home, you can avoid paying mortgage default insurance. Mortgage default premiums can range anywhere from 0.6% to 4.5% of your mortgage amount ––this can mean big money. If you were to have a $500,000 mortgage, your insurance premiums could range from $3,000 to $22,500.
Lower Interest Rates: Lastly, by paying a larger down payment, you may be able to receive a lower interest rate. This is because a higher down payment means less risk associated with providing these mortgages for the lenders as they can recover their money easier if the borrower was to default on their loan. Generally, the lower the risk, the lower the interest charged.
Pay Less in Interest: The smaller the loan, the less you will pay in total interest over the life of the mortgage, saving you money in the long run.
Build Equity Faster: The larger your initial down payment is, the sooner you will build up enough equity that you can access through a refinance equity-take out.
What are the Acceptable Down Payment Sources?
There are plenty of down payment sources for you to choose from. That said, it’s important to have the correct information and paperwork available when qualifying a down payment so the lender can verify the sources. Be prepared to provide proof of where the money is coming from – such as bank statements, investments statements, etc. – as these are required to meet lender and legal guidelines.
Here, we’ll be going over the sources you can use for your down payment and what you will need to provide lenders.
Home Buyers Plan (HPB)
The HPB can help with your down payment by allowing you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP). You can withdraw these funds without paying the tax, but the catch is that you must repay the funds you have withdrawn for your down payment within 15 years.
It is important to be sure that you can make the repayment within the 15-year window, or else you will be on the hook to pay the tax on the funds that have not been repaid.
To qualify for the Home Buyers Plan, you must:
- Be considered a first-time homebuyer
- Have a written agreement to purchase or build a qualifying home
- Be a resident of Canada when you withdraw the funds under the HBP up to the time a qualifying home is bought or built
- Intend to occupy the qualifying home as your principal residence within one year of it being built or purchased.
New Tax-Free First Home Savings Account
This new government program expected to roll out in 2023 will allow Canadians to save up to $8,000 each year, up to a total of $40,000, and withdraw it tax-free to purchase their first home. The Tax-Free First Home Savings Account will act much like your RRSP. Any contributions made will lower your taxable income by that amount, and any earnings will accumulate tax-free. However, unlike when you withdraw funds from your RRSP under the HBP, you will not be required to pay back the funds.
TFSA and Savings
Of course, simply taking funds from your savings is an acceptable form of down payment. However, it is essential to remember that if you are pulling funds from investments, capital gains tax will need to be paid, and any money pulled from your RRSP (unless pulled under the HBP) will be taxed when withdrawn.
Gifted Down Payments
Who can provide the gifted down payment?
Lenders will allow you to use funds gifted to you from an immediate family member for your down payment. Immediate family members include:
If the gift is coming from an extended family member such as an aunt/uncle, be sure to tell your mortgage broker so that they can formulate the best solution and determine if the lender will grant an exception to allow it.
How can the Gifted Down Payment be Sourced?
Now that we know who can provide the gift, let’s look at what the allowable sources of the gifted down payment are:
- Cash savings
- Reverse mortgage funds
- Refinance to access equity to be passed on as a gift
- Second mortgage on the property, cashed out and passed on as a gift
- Investments de-invested into a cash position
Requirements from the Giftor
In order to satisfy the lender, the giftor will need to sign a gifted down payment letter issued by the lender. This letter will include:
- A statement that the gift will not be paid back and will not cause the recipient a financial burden.
- The donor’s contact details, the amount gifted, the date of the gift, and their relationship to the recipient.
- Provide 30-days of bank statements (This may be required depending on the lender)
Requirements from the Recipient (You)
Depending on the lender, you will typically be required to provide 30-90 days worth of bank statements that show the receipt of the gift for the down payment and any other sums of money.
Borrowed Down Payments – Credit
For the most part, lenders will allow you to use credit/ borrowed money like a credit card or line of credit for a down payment. However, the credit used will be added to your debts, affecting your TDS (Total Debt Servicing) Ratio, which can impact your ability to even qualify for a mortgage as the TDS ratio is an important part of the mortgage stress test.
Money from Overseas
You are allowed to use money originating from another country; however, you need to be aware of some rules around this.
Down Payment from Your Resources in a Foreign Account
If you pull your own money from a foreign account to put towards your down payment, the funds must be deposited into a Canadian account 90 days before closing. You will also need to provide the lender with a copy of the wire transfer form and will often be required to supply them with a 90-day history of the foreign bank account that transferred the funds.
Down Payment Gifted from Overseas
Gifted down payments from overseas will also be required to be in Canada and deposited into a Canadian account 90-days before closing. You will be required to provide a copy of the wire transfer form and a 30-day bank history of the giftor.
It is important to note that most lenders will want to see the gifted amount to provide mortgage approval, and your mortgage agent will want to verify the funds, so the sooner it is sent, the better.
The same rules mentioned above for gifted down payments apply ––they must be an immediate family member, and a signed gifted down payment letter is required.
Funds coming from incentives is another excellent option for your down-payment. The First-Time Home Buyer Incentive provides qualifying first-time home buyers with an interest-free shared equity mortgage of 5% or 10% of their home’s purchase price.
Check out our blog about the First-Time Home Buyers Incentive to learn more!
Another potential source for your down payment is using existing equity. You can use the equity that is pulled from a:
- Buy and sell situation
- Reverse mortgage
Depending on which option you use to pull equity, you will need to provide the lender with certain documentation to verify the transaction. This can include one or a combination of the following forms:
- MLS agreement
- Agreement of Purchase and Sale (APS)
- Trust ledger
- Refinance/mortgage documentation
A lot more goes into a simple mortgage down payment than meets the eye. You need to make sure it’s coming from an acceptable source and have all the documentation necessary for the lender to accept it. Not to mention you need to consider how much you are required to put down and how the amount you have chosen will affect your mortgage costs.
Your best option to ensure you are making the right decisions when it comes to your down payment is to work with a mortgage broker. The agents at Pineapple are experts in their field and will be able to walk you through the down payment process and provide valuable insights as to how your down payment will affect your overall mortgage. Give us a call today to get started!