Chapter 2: Purchasing and Closing

All About Down Payments

 

How much of a down payment do I need to qualify for a mortgage?

 

The amount of your down payment will vary depending on the purchase price of the property as well as your unique financial situation. However, down payments must at a minimum satisfy these requirements:

 

• If the purchase price of the property is $500,000 or less, the minimum down payment is 5% of the purchase price.
• If the purchase price of the property is between $500,000 but below $1,000,000, the minimum down payment is 5% on the first $500,000 and 10% on the remaining portion of the purchase price.
• If the purchase price of the property is $1,000,000 or greater, the minimum down payment is 20% of the purchase price.

 

How can I fund my down payment?

 

There are many different options for funding your down payment on your property, some of which are listed below.

 

Savings, Short-Term Investments, and Tax-Free Savings Accounts (TFSA) 

If you have personal savings, short-term investments like Guaranteed Investment Certificates (GICs) or other investments, these are excellent sources of funds to use towards your down payment. Additionally, if you have investments in a Tax-Free Savings Account (TFSA), consider using them to fund your down payment. 

 

Lenders may require bank statements for your accounts, including your savings accounts and investments. Additionally, it is a good idea to be prepared to explain any large deposits into your accounts.

 

Gifts

If you are fortunate enough to receive your down payment as a gift, you should be prepared to provide a letter to the lender confirming that the proceeds you received are a “true” gift and that you are under no obligation to repay the proceeds. Your relationship with the relative who gifted you the down payment must also be disclosed. 

 

Proceeds from a Sale of a Property

If your down payment is coming from a sale of a property, you may be requested to provide a copy of a firm purchase offer on the new property and a copy of your current mortgage balance (if applicable).

 

Registered Retirement Savings Plan (RRSPs)

If you are a first-time homebuyer, it may be to your advantage to withdraw your down payment from your RRSP. The Homebuyer’s Plan is a government-run program that allows first-time homebuyers to withdraw up to $25,000 tax-free from their RRSPs to fund their down payment on their principal home (i.e. primary residence). It is important to remember that the withdrawal from the RRSP is considered by the government as a loan; your withdrawal must be repaid back to your RRSP within a 15-year period. For more information about the Homebuyer’s Plan, please visit the Canada Revenue Agency website or speak with your accountant.

Borrowing

It is possible to borrow your down payment (i.e. personal loans, lines of credit, etc.); however, be aware that purchasers who borrow their down payment generally face higher default insurance premiums and higher credit criteria to qualify for a mortgage.

 

 

Closing costs

 

Closing costs are expenses you incur during the process of obtaining a property, payable on the date that your real estate transaction is completed. This section will go over some common closings costs that you are likely to encounter.

 

Default Insurance

 

If your mortgage is considered a high-ratio mortgage, you will be required to obtain default insurance that protects the lender if a borrower defaults on their mortgage obligations. High-ratio mortgages are generally defined as mortgages where the purchaser’s down payment on the property is less than 20% of the purchase price. 

 

The most common default insurance is provided by the Canada Mortgage and Housing Corporation (CMHC). The premium for the insurance policy ranges between 0.6% and 4.50% of the mortgage amount and can be paid at the time of purchase or added to the principal amount of your mortgage. The borrower is responsible for the insurance premiums.

 

Levies and Taxes

Depending on the location of your property and the unique circumstances of the real estate transaction, you may have to pay HST/GST, land transfer taxes, development levies, and other fees. Your legal counsel will provide you with a statement of adjustments on closing that outlines exactly what your financial obligations are.

 

Legal Fees

To properly close your real estate transaction, it is strongly advised to seek legal counsel. Your lawyer or solicitor will go over the closing documents, provide you with a statement of adjustments, and ensure that your transaction is completed in your best interests and promptly. Legal fees vary widely depending on several factors, but generally budgeting around $1,500 for these services should be sufficient.