When buying a home, this is a question many people want to know the answer to. The most straightforward one is simply – no, you can’t get a mortgage without a down payment. In Canada, it is required to give a minimum 5% down payment in order to get a mortgage. But sometimes you don’t have the 5% because you didn’t know you needed it in the first place. But all’s not lost – you do have options that we will review below.
“Gifted” Down payment
A gifted down payment is especially common for first-time buyers. With the economy as it is nowadays, it’s no wonder people need a helping hand every now and then, especially when purchasing something as big as a new home.
A gifted down payment typically comes from an immediate family member who is in a position to help out. The family member needs to sign a gift letter which says that the gift doesn’t have to be repaid. They can give you the entire amount of the down payment or just one part.
For example; you are purchasing a property for $300k, you have $10k saved up, your parents are able to gift you the remaining $5k to make up the total 5% down payment.
Borrowed Down payment (Flex-Down)
If you don’t want to miss out on a hot real-estate and you don’t have that 5% OR any immediate family members to help you out, what you CAN do is borrow for your down payment. If you have a solid income compared to the sum you want to borrow, you may be a suitable candidate for a borrowed down payment. You can borrow the entire sum of 5% as long as you count it towards your GDS (gross debt service) ratio. Naturally, this loan would be a separate one from the mortgage. A borrowed down payment can come via credit cards, personal lines of credit, or personal bank loans. Typically, on the “flex-down” mortgages you can expect a bit higher rate as there is a bit more risk associated with a borrowed down payment.
Registered Retirement Savings Plan (RRSP)
Another great source for your down payment is a registered retirement savings plan (RRSP). The Canadian government has a Home Buyers’ Plan (HBP) which basically borrows first-time home buyers up to $25k from your RRSP for your down payment (tax-free.) Another great thing is if you’re buying a home with, say, your partner, who also happens to be a first-time home buyer you would both for up to $25k each.
Below is the Home Buyer’s Plan (HBP) PDF document from Canada Revenue Agency for your reference.
Home Buyers Plan (HBP) – CRA
Regardless of how much money you have available to you at this time for a down payment, if you are considering purchasing a property in the near future, please let us know. It’s never too early to start the conversation about getting pre-approved for a mortgage.
Contact us anytime!