Downpayment 101

What is my minimum down payment and how does it affect my application?

There are 3 types of down payment scenarios:

1. A down payment of between 5% - 19% of the purchase price is considered a “high ratio mortgage” because the loan amount compared to value of the home is greater than 80%. For this reason, banks require the borrower to purchase “default” mortgage insurance which protects the bank in case of default. This insurance is added to the total mortgage amount that the client borrows.

2. A down payment that is 20% of the purchase price or greater is considered a “conventional mortgage”. This does not require any insurance premium as the loan amount comparied to the value of the home is 80% or less.

3. A down payment of “less than” 5% is called a “flex-down” mortgage. Borrowers with strong income may be able to borrow their 5% down from an unsecured line of credit. These mortgages aren’t as common as they used to be, but if you have solid income and you’re just struggling with the down payment, this may work for you.

Where can my down payment come from?

1. Cash Down Payment (savings, chequing, investments)

Any cash down payment will need to be verified with 90 days history. This means that we’ll need a bank statement from your account, showing the history in that account for the last 90 days. You will need to make sure your that statement history shows your name and account number to prove ownership of these accounts.

2. Gifted Down Payment (from a direct family member)

The most important thing about gifted down payments from family is that they must come without any repayment obligation. This agreement requires a letter (that we will provide you), signed by both parties, indicating this is “non-payback” transaction.

3. RRSPs

The government of Canada has an incredible program where you may use up to $35,000 of your RRSPs TAX FREE towards your down payment and you have 15 YEARS to pay it back before being taxed. This one is pretty easy to verify. You will provide us with the withdrawal form you sign at your bank holding the RRSPS, along with your respective RRSP statement.

It is important to note that you can pull RRSP funds and use them for your down payment even if you aren’t a first-time home buyer. The financial institution at which these funds are held will withhold 30% for taxes. Not ideal (obviously), but totally possible.

4. Borrowed (against an existing property)

Borrowed funds can only be mortgaged from an existing property with enough available equity. We will require confirmation of this via mortgage statements showing your current available equity.

5. Sale proceeds

You may be selling you’re an existing property and applying the proceeds towards the down payment of your new purchase. We will require the firm sale contract, your current mortgage statement and confirmation of the sale proceeds deposited into your account. If the sale goes through after your purchase, you may need bridge financing to help funds your down payment in the period before your sale. No problem, we’ve got a solution for that!

6. Unsecured lines of credit

As we mentioned up top, some borrowers, with strong income, qualify to borrow their 5% down payment from an unsecured line of credit. If you’re considering this, reach out to us! We can run the number and figure out exactly what you would qualify for if you’re borrowing your down payment. This strategy isn’t for everyone, but with increasing rents and decreasing mortgage rates in Alberta, more borrowers are stretching to purchase a property instead of rent.