How to Save For a Down Payment: 5 Tips to Help You Buy a House
Most mortgages require a down payment of 5–20%, which may be the most significant cheque in one's lifetime. Considering that the housing market in Canada is surging, finding low down payment options may be essential for buyers who hope to quickly plan to move to a new home. Luckily, saving for a down payment can be easy when you know about first-time buyer incentives, mortgages with low upfront costs, and other forms of homebuying assistance.
Are There Zero Down Payment Options?
The Canadian parliament voted to outlaw zero down payment mortgages in 2008, but there is a way buyers can get around the rule legally by borrowing the minimum amount. The only approach to this is Flex Down, which requires buyers to use a line of credit to borrow their minimum down payment—usually 5–10%. Another option is to obtain a gift to cover the costs.
Receiving Gifts Towards Down Payments
Those opting for a conventional mortgage can receive a down payment gift. However, it typically is required that it comes from a family member. For example, parents can give their child or another relative money for a down payment as a gift. They can even cover mortgage payments or buy the home outright, and there are no taxes on cash gifts in Canada.
Use the First-Time Home Buyer Incentive
First-time home buyers might qualify for a shared equity mortgage through the Government of Canada. This program offers buyers financing without interest, which can reduce mortgage payments without the down payment increasing.
The First-Time Home Buyer Incentive program offers 5–10% of the home's purchase price that buyers can put toward a down payment. However, these incentives must be repaid over the next 25 years or when the home is sold.
Furthermore, those who qualify can take a First-Time Home Buyer Tax Credit (HBTC). Those who buy a qualifying home can receive a tax credit of up to $750.
The Home Buyers' Plan
Canada offers a Home Buyers Plan (HBP) to assist with down payments. The HBP allows buyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) tax-free. This amount must be used to build or buy a qualifying home, and the funds withdrawn must be repaid within 15 years. Before signing up for the HBP, consider the following:
- Whether repayments are feasible
- Whether fund withdrawal will impact retirement savings
- That not making repayments can affect income taxes
- One could lose out on RRSP growth
While an HBP may not be the best choice for everyone, the funds can help buyers cover private mortgage insurance required by lenders if less than a 20% down payment is secured.
Be Prepared for CMHC Insurance with Down Payments Below 20%
Buyers who put down less than 20% will be mandated to pay mortgage default insurance. Commonly referred to as CMHC insurance, this default insurance protects lenders should the borrower stop making payments for any reason.
CMHC insurance premiums are worked into the monthly mortgage payment when buyers put less than 20% down toward the purchase price. Default insurance can be avoided entirely by putting at least 20% down, which some of the programs mentioned above can assist with.
Short On Down Payment Funds? There are Options!
As you can see, there are a few options to help buyers get into a home more easily, including government support. If making a standard down payment isn't possible, learn more about each program to find one that best suits your financial needs; finding the right one will have you planning energy-efficient home upgrades in no time!