One of the largest obstacles first-time homebuyers face when looking to buy a home is saving enough money for a down payment. Fortunately, there are a number of down payment sources and first-time homebuyer programs available to help get you into a home sooner – building equity in your own property as opposed to paying down your landlord’s mortgage.
Thanks to mortgage default insurance, the minimum down payment when buying a home in Canada is 5% of the purchase price for a property valued at $500,000 or less and 10% for the portion of the purchase price above $500,000.
Without mortgage insurance, the minimum down payment would be 20%. This insurance protects lenders in case you default on your mortgage, and is provided by three companies in Canada – Canada Mortgage and Housing Corporation (CMHC), Genworth Financial, and Canada Guaranty.
How to save for a house quickly
In addition to straightforward budgeting and saving, there are numerous ways to help with your down payment in Canada that can get you into a home sooner – known as ‘traditional’ or ‘non-traditional’ sources.
In addition to your savings account, examples of traditional down payment options include: investments; RRSPs; non-repayable gift from an immediate family member; and proceeds from the sale of another property.
The available non-traditional down payment methods include: borrowed money (line of credit, credit card, personal loan or family member loan); and lender cash-back incentives.
Non-traditional down payment options are typically only acceptable for use by borrowers with favourable credit and solid repayment history.
It’s also important to understand that interest rates are typically higher when opting for non-traditional versus traditional down payment options.
First-time homebuyer programs
There are a number of incentives and rebates available for first-time homebuyers to help cover such things as down payments and closing costs – two significant expenses in the homebuying process.
One popular down payment source includes borrowing from your registered retirement savings plans (RRSPs). Under the Home Buyers’ Plan (HBP), first-time homebuyers can withdraw up to $35,000 from their RRSPs ($70,000 as a couple) for a down payment. This is a tax-free, interest-free loan, where funds must be repaid over 15 years (annual payments of one 15th of the total amount are required). Another requirement is that the money must be in the RRSP account for a minimum of 90 days prior to being withdrawn for HBP use.
Another program – The First-Time Home Buyer Incentive (FTHBI) – was designed to help ease mortgage costs for first-time homebuyers by reducing monthly payments through shared-equity loans – up to 5% toward the down payment of a resale home and as much as 10% for newly-built homes. The idea is that, by increasing the size of your down payment, the FTHBI reduces monthly mortgage costs, making homeownership more affordable.
Have questions about how you can save for a down payment on a house quickly? Answers are a call or email away.