How many of you are struggling to save at least 5% down and sweating about whether or not you could even qualify for a mortgage? If this is you, I can 100% say you are not alone. I get calls everyday from people who worry – just like you. The most common questions I receive are:
- How much do I need to save?
- Can I borrow a Down-Payment?
- Where can the down-payment come from?
- Can my mom and dad give me the down-payment? How does that work?
Down payment is a foundational pillar to home ownership, lenders want to know that you have some equity in the property and that you have made an effort to put aside/save each month to achieve the goal. So, to answer the most frequently asked questions:
How much so I need?
For the most part a minimum of 5% down is necessary to secure a mortgage. Having said that, there is no reason why you cannot have more money down. Anything less than 20% of the purchase price of a home is what we call an Insured Mortgage, meaning the lender involved will insure the mortgage to protect them in the event that you are unable to make payments in the future. The majority of first-time home buyers are in fact insured mortgages.
Can I borrow a downpayment?
The short answer is no, having said that, it is possible to have someone “gift” you the down-payment. A Gift means the person you receive the gift of money from cannot enter into a payment plan to return the money to them.
Where can the down-payment come from?
Knowing how challenging it can be to save for a purchase as large as a home, the federal government has put in place programs to assist with the savings habit. The most recent program is the First Home Savings Account. This account works like an RRSP – when you deposit, it is tax deductible and it acts like a TFSA when you withdraw – it is not taxable. This type of account has a maximum deposit of $40,000 per year.
For many home buyers having an additional 5% -10% down can help off-set closing costs or contribute to a larger down-payment and a reduced monthly mortgage payment. The First Time Home Buyers Incentive program allows first time buyers to access an additional 5% down for purchasing an existing home or additional 10% down if they are purchasing a new build. The additional funds are considered a shared equity program where the home owner will repay the original amount plus a small share in the increased value of the home at the time of sale. Home owners have 25 years to repay the amount or when they sell, which ever comes first. (if the home decreases in value you may owe less)
The most widely used program is the Home Buyers Plan – a program that allows you to withdraw up to $35,000 from your RRSP plan to purchase a home. This withdrawal is tax free at the time of withdrawal and requires the amount taken to be repaid within 15 years. This is broken down into a deposit into your RRSP account annually of 1/15th the borrowed amount. The big benefit to this program is that you continue the savings habit by replenishing the RRSP account. Leaving you with both 15 years’ worth of equity in your home and a rebuilt RRSP plan.
Many people have an RRSP matching program at work. Matching programs are the equivalent to free money. You put in a percentage of your pay each month, say 5%, and the company matches that deposit. This total amount is tax deductible and often produces a refund at tax time – which can go into a savings account and be used to increase your down payment savings.
An ever-increasing way of gathering a deposit is a gift from a family member. Many parents and grandparents are opting to place a Reverse mortgage or a traditional mortgage on their homes, and give what many are calling a “living Inheritance”. The benefit is mutual to all parties as the giver is able to be apart of enjoying the use of funds and the receiver is able to share their gratitude personally not think of it as a memorial gift. No matter where the gift comes from, it must have a letter in writing confirming it is a gift with no payments and they must be able to show where the money came from. (Parents investments or savings account are the top two). It is important to note that only parents, grandparents and siblings can gift a downpayment.
Above and beyond all programs and incentives is the actual simple math of saving. Amazingly it does not take long to create a habit that sees an account with an increasing balance. The more you apply basic strategy the closer you get to your goal. Here are some simple strategies to help get you going.
Budget Monthly to Save
In a perfect world 10% – 15% of your monthly income should be put aside in savings – money that makes up an Emergency Savings account or specific savings goals. One of the easiest ways to establish a savings habit is to determine how much an average mortgage and taxes payment would be in your price range. Then budget that amount every month and put the difference between rent and the future mortgage payment away in savings. By the time you have the downpayment you have already learned how to live within the budget.
Top up Savings Account
This is simple solution to add quickly to the savings pool. Set up a top up savings account in the app for your primary bank account. Have the system automatically round up to the nearest dollar and put the difference into the top up account. So, a purchase of $25.50 would put $0.50 into the top up account. Makes for really easy budgeting in your primary account as everything is round numbers! The Top up Account grows and you really do not even think about it.
RRSP Account
RRSPs are a great way to save and leverage for the downpayment on a house. If you have an employer with a matching program, this can significantly increase your RRSP savings amount. Let’s say you put 5% of your monthly wages into an RRSP savings and your employer matches that and contributes 5%. That is 10% savings per month (Best Practice). Compound interest on the RRSP adds up quicker than you may think and by continuing to invest in savings like an RRSP after you purchase your home, means money for improvements and emergencies in the future.
Home ownership is a marathon – not a sprint. The first step is committing to start saving, then work with a mortgage broker to plan out the rest so when the money is in the savings account- you are ready to get into a new home.
