How To Make Your Down Payment

It’s the reason you clip coupons and choose the office coffee rather than hitting the local coffee shop on your way to the office. It’s the reason you’ve become more familiar with the creatively cost-efficient “staycation” rather than a lavish vacation, and the reason you carefully consider each purchase before swiping your card.

That’s right, it’s time to discuss the down payment, and more importantly, answer the question what is a down payment? In this blog, we’ll explore five key down payment options available to Canadian homebuyers with a focus on rules and programs specific to Ontario.

Down Payment Basics

For those of you who have done your research, you know that when it comes to your down payment, you have a few options to consider. The down payment is part of the purchase price that you come up with in advance of getting your mortgage, and the amount of your down payment is something you should have set before beginning the search for your dream home.

Aiming to purchase a home in the near future? Explore these related blogs for more advice!

What is a Conventional Down Payment?

A conventional down payment is typically 20% or more of the purchase price of the home. This is the standard option for those who have saved a substantial amount of money and want to avoid paying for mortgage default insurance.

With a conventional down payment, your mortgage will be considered uninsured, meaning you won’t have to pay additional premiums to the Canada Mortgage and Housing Corporation (CMHC), Genworth, or Canada Guaranty.

If you can manage to save a conventional down payment, it’s an excellent choice for lowering your overall borrowing costs.

Key Benefits:

There’s no need for mortgage insurance. This reduces your overall borrowing costs, as mortgage insurance premiums can add up.

You’ll have more equity in your home from the start. With a larger down payment you’ll immediately have more equity in your home which is a financial safety net in case property values fluctuate.

Key Considerations:

Saving takes time. Accumulating 20% or more of the home’s purchase price can be challenging, especially with Ottawa’s rising real estate prices. Sometimes it might make more sense to go another route to get into the market faster.

There’s less flexibility. While this option offers long-term savings it may delay your home purchase while you work on saving the funds.

Not sure what you can afford to spend on a home? Click here to access our home-buying calculator.

Lower Down Payment with Mortgage Insurance

For those unable to save 20%, the option of a low down payment is still viable. In Canada, you can purchase a home with as little as 5% down for properties priced at $500,000 or less. For homes between $500,000 and $999,999 the minimum down payment is 5% on the first $500,000 and 10% on the remaining amount.

For example, if you purchase a home for $600,000, you would pay 5% on the first $500,000 and 10% on the additional $100,000.

However, if your down payment is less than 20% you will be required to obtain mortgage default insurance through CMHC, Genworth, or Canada Guaranty. This insurance protects lenders in case you default on the loan but it does come at a substantial cost ranging from 2.8% to 4% of the mortgage amount depending on how much you’re putting down.

For first-time homebuyers in Ottawa, this is often the most practical and most used option due to the relatively high cost of homes in the area.

Key Benefits:

You can buy with a lower downpayment. This option makes homeownership accessible to those who may not have 20% available for a down payment.

You get access to competitive rates. Insured mortgages often have lower interest rates because the lender is taking on less risk since it is insured.

Key Considerations:

There’s a higher overall cost. Mortgage insurance premiums will increase your mortgage balance which can add up over time.

Because you’re borrowing more money, you’ll also have less equity in the property initially meaning you’ll take longer to pay off your home.

You can find plenty of other home-buying guides on our site! Check out these blogs next.

Using Your RRSP: The Home Buyers’ Plan (HBP)

If you have been diligently saving in a Registered Retirement Savings Plan (RRSP), the Canadian government allows you to withdraw up to $35,000 tax-free ($70,000 for a couple) to put towards your down payment through the Home Buyers’ Plan (HBP). You have 15 years to repay the amount you withdraw starting two years after the purchase of your home.

This option is particularly helpful for first-time homebuyers who have saved in an RRSP and need additional funds to secure a home in Ottawa’s competitive market.

Key Benefits:

You won’t be taxed on the amount you withdraw as long as you follow the repayment guidelines.

Accessing these funds can help you meet the minimum down payment requirements or even contribute towards a conventional down payment.

Key Considerations:

You must repay the funds to your RRSP within 15 years or the amount will be added to your taxable income for the year you miss the repayment.

While using your RRSP may help you purchase a home, it will also reduce your retirement savings so it’s important to plan carefully.

Gifted Down Payments

Family members sometimes might be able to help first-time buyers by gifting part or all of the down payment. The Canadian mortgage system allows you to use gifted funds as part of your down payment as long as the money is a true gift and not a loan. Lenders will typically require a gift letter from the family member confirming that the funds do not need to be repaid.

Key Benefits:

Gifted funds can significantly reduce the time needed to save for a down payment. Plus, family help can make buying a home more achievable, faster.

Key Considerations:

Lenders will require proof that the money is a gift and the family member’s finances can be reviewed.

First-Time Home Buyer Incentive (FTHBI)

The First-Time Home Buyer Incentive (FTHBI) is a shared-equity mortgage with the federal government allowing eligible first-time buyers to finance a portion of their home purchase with the government’s help. The incentive provides 5% or 10% of the home’s purchase price for newly constructed homes and 5% for resale homes. The buyer must repay the incentive when they sell the house or after 25 years, whichever comes first.

While this is a viable option, it has not been very popular since it was released due to the shared appreciation consideration.

Key Benefits:

By borrowing less your monthly mortgage payments will be reduced which can free up your cash flow.

You might be able to afford a slightly higher-priced home due to the additional funds from the incentive.

Key Considerations:

When your home value increases you will owe more when it comes time to repay the incentive as the repayment is based on the home’s value at the time of sale.

Which Path Works For You?

Navigating down payment options is an essential first step toward homeownership in Ottawa. Whether you’re leaning towards a conventional down payment, taking advantage of government programs like the Home Buyers’ Plan or the First-Time Home Buyer Incentive exploring low down payment options with mortgage insurance, there’s a strategy to fit your financial situation.

Understanding these options will ensure you’re well-prepared when it comes time to purchase your home.

More questions or looking for more direction? Contact us today for a free, no-obligation meeting. Send us an email at Info@PilonGroup.com or call 613.909.8100.