When purchasing a property and the borrower needs a mortgage, a down payment is necessary.

The down payment is the capital that the investor personally invests in the property. The more of their own capital the borrower invests into the property, the more they will do to maintain their mortgage. The lender also feels more secure about their investment.

Because of the obvious importance of down payments, banks and the government have put very clear rules around minimum down payment amounts and down payment sources.

Down Payment Amounts:

The federal government uses the minimum down payment required as a tool to regulate the mortgage and housing market. Since 2008, we have seen major changes in the smallest required down payments.

Here are the minimum down payment requirements for residential properties and AAA lenders:

    • 0%

The minimum down payment of 5% comes from cash back. These mortgages always come at a substantial interest rate premium, thus, they are not recommended. Federally regulated financial institutions are also prohibited from offering these mortgages.

    • 5%

Principal residence or secondary home, owner occupied, and verifiable income for a home. In addition, the purchase price must be less than or equal to $500,000.

    • 5% of the first $500,000 and 10% of the rest

Principal residence or secondary home, owner occupied, and verifiable income for a home. In addition, the purchase price is below $1M and more than $500,000.

    • 10%

Owner occupied + Rental, verifiable income, for a property legally zoned to a maximum of 4 units. The purchase price is below $1M.

    • 10%

Principal residence and stated income. The purchase price is below $1M.

    • 20%

Principal residence or secondary home and verifiable income. The purchase price is more than $1M.

    • 20%

Investment property and verifiable income.

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Down Payment Sources:

Down payments are legally allowed to come from many resources which I will list below:

    1. Own Resources

This could be:

      • Savings
      • Stocks
      • Bonds
      • TFSA
      • GICs
      • RRSPs
      • Corporate accounts (self-employed borrowers)
      • Money-under-the-mattress.

Two of these deserve special mention:

      • RRSPs

First time home owners qualify for the federal government’s Home Buyer Plan (HBP). This allows each borrower to draw up to $25,000 from their RRSP, tax free and then pay it back over 15 years.

      • Money-under-the-mattress

This is a personal fund that is kept at home. This should be deposited into a bank account at least 3 months before a property is purchased.

 

    1. Gifted Down Payments

Down payments can be gifted. Typically, this is only for the purchase of a principal or secondary residence and not for rental properties. Gifted down payments can only come from parents, siblings and grandparents. No one else. In addition, a compulsory letter must be signed by the donor(s) and borrower(s) stating that there is no obligation to pay the money back.

    1. Borrowed Down Payments

Down payments can only be borrowed from a mortgage or Home Equity Line of Credit (HELOC) of a property that belongs to the borrower. It cannot be borrowed from any other facility such as a credit card, line of credit etc. Furthermore, it also needs to be mentioned that all down payments are accepted at the discretion of the lender.
For example:
John earns a substantial salary and has been working for a while. He has damaged credit and substantial debt. Also, his down payment is gifted. In John’s case, it might be hard to get his down payment approved by the lender. This is because the lender might deem his financial habits to be from poor character. John also has none of his own capital invested in the mortgage.

The source(s) of the down payment needs to be disclosed up front at the time of the mortgage application. The Anti Money Laundering (AML) Act requires that all down payments be verified. Three months of bank statements are also required from any and all accounts where the down payment originates from. In addition, all unmarked deposits of more than $2,500 also have to be authenticated.

The best and most secure down payments are funds saved from your own resources. However, in today’s climate of high and rapidly increasing home prices, this is not always possible.

If you need help getting the right mortgage, get in touch with us!

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