What are the down payment options when buying a home?

One of the biggest hurdles in buying a home these days is the down payment — the money you put up front when you purchase a property. In Canada, the down payment requirement can range from five per cent to 20 per cent, depending on the purchase price and what the property is being used for – as the homeowner’s prime residence, or as an investment.

With a purchase price of less than $500,000, the minimum down payment is five per cent of the total purchase price. If the agreed upon price is between $500,000 and $999,999, the minimum down payment is five percent of the first $500,000, and 10 per cent of any amount over that. If the purchase price is $1 million or more, the minimum down payment is 20 per cent.If the property is being purchased as an investment, the minimum down payment is 20 per cent.

These percentages are subject to a purchaser’s credit history and are at the discretion of the lender.

Traditional down payment options that can be used include savings, a registered retirement savings plan (RRSP), gifted funds, and the proceeds of the sale of another property. Read on to learn the details of each of these options.

• Savings and First Home Savings Account (FHSA)

Your savings are the most traditional form of down payment. Most often a lender will require a 90-day history from your bank to show the accumulation of these funds.

The newly introduced First Home Savings Account (FHSA) is a great way to save for a down payment and was designed to help Canadians save money to purchase a home. If you meet this type of account requirements, you can save up to $8,000 a year to a maximum of $40,000 on a tax-differed basis. This account is a registered plan that allows first-time homebuyers to build up savings while also providing the benefit of reducing taxable income in the year the money is contributed, and if not used within 15 years, can be transferred to an RRSP, tax free.

• RRSP

RRSP withdrawals under the Home Buyer’s Plan allows each first-time homebuyer to borrow up to $60,000 from their RRSPs for a down payment.

This is a tax- and interest-free loan that must be repaid over 15 years and your first year of repayment is between two and five years after the funds were withdrawn. Annual payments can be made each year, or it can be counted as income on your tax return.

To qualify for this plan, you must meet the following criteria:

• You must be a first-time homebuyer
• You can be considered a first-time homebuyer if, in the previous four-year period, you did not occupy a home that you owned, or one that your current spouse or common-law partner owned.
• If you have recently divorced or separated, you can qualify as a first-time buyer assuming that you have been living separately and apart from your spouse or common-law partner for at least 90 days and are not living in a home owned by a new partner or spouse at the time of withdrawing the funds.

• Gifted funds

There is also the option of being gifted the money, which is not a loan. There are stringent guidelines. Down payment gifts can come from an immediate family member only – parents, grandparents or siblings. Letters to this affect are signed and there is a paper document trail to show where the money came from.

• Proceeds from the sale of a property

If you already own a property and sell it, any money that remains after the costs associated with the sale can be used as a down payment for the purchase of a future property.

First things first

The down payment is the first big hurdle for you to be able to move forward in buying your dream home. It’s best to check with a mortgage expert to find out more about the qualifying criteria and availability to ensure your source of down payment is eligible.