3 Surprising Sources for Down Payment Funds
After choosing a mortgage type, it's time to make a down payment. The more money a buyer has for their down payment, the better the terms of their loan. Down payments of 20% or more, for instance, can help buyers avoid mortgage loan insurance. This alone can save hundreds a month. Plus, a larger down payment means that buyers have to borrow less, which can save thousands in interest over the life of the loan. Resourceful borrowers should consider any of the resources below to increase what they have on hand when it comes time to buy. Keep reading to learn about the best ways to fund a down payment.
How Big Is a Down Payment in Canada?
The amount needed for a Canadian home down payment depends on the purchase price of the house and what kind of property it is.
The first $500,000 of a home's cost requires a 5% down payment. For homes between $500,000 and $999,999, any part of the purchase price over $500,000 requires 10% of the purchase price as a down payment. Homes over $1 million require a 20% down payment.
Additionally, there are higher down payments associated with investment properties. A buyer who purchases a duplex to live in one-half can qualify for the residential rates. People buying a rental property that they will not occupy need a minimum down payment of 20%.
Luckily, several programs can help prospective buyers come up with the funds that they need.
First-Time Home Buyer Incentive
Buying a home for the first time? Look into the First-Time Home Buyer Incentive. This program offers a 5% to 10% fund that can be used toward the down payment on the home. Any incentives have to be paid back within 25 years or when the buyer sells the home.
The program is open to people buying homes for the first time. There are income limits that are based on where in Canada the home buyers reside. The program also has limitations on how much a home buyer can borrow relative to their qualifying income.
Home Buyers' Plan (HBP)
The HBP allows borrowers to withdraw up to $35,000 from their Registered Retirement Savings Plan tax-free. The funds must be used to buy or build a qualifying residential property. With down payments of a minimum of 5% required on homes with purchase prices of $500,000 or less, this can get buyers a long way toward the funds they need.
However, buyers need to consider the implications of using HBP funds carefully. The funds must be repaid to the account within 15 years to avoid tax penalties. Additionally, withdrawing the funds can harm savings for retirement.
Some borrowers can have at least part of their down payment covered through a gift from a family member. In some cases, family friends, godparents, or others unrelated to the borrower can provide some funds. This, however, is up to individual lenders. Some lenders are open to it, while others are less flexible.
A gift can cover up to 100% of the down payment for borrowers with good credit and conventionally employed. Self-employed people or people with previous credit problems may have to come up with more funds on their own.
Find the Best Down Payment for You
Every bit that a buyer can put toward their down payment and other costs associated with buying a home can reduce mortgage payments through the life of the loan. Whether buying a first home or exploring other real estate investment options, taking some time to look at all of the options available for down payment assistance can help build a more significant nest egg. Use whatever funds are at your disposal to get yourself closer to the dream of owning your own home.