The different ways to obtain a down payment (taus hypothecaire).

When you apply for a home loan, one of the most important issues the bank will look at is whether you have a down payment and how much it is. Even a small one will have an influence on the loan - hypotheque.

What are the ways of obtaining a down payment?

There are many different methods to obtain a down payment for your home. There are the standard, usual ones, but there are others that most people don’t know about but I have learned about during the many years I have been advising my clients regarding their mortgages. Basically, there are three ways - hypotheque:
A. Your own money
B. A gift from a relative
C. Funds obtained from other people or in a different way

Making a down payment from your own funds

Funds coming from one’s own holdings are the most common kind of down payment. This means that the down payment is taken from the assets of the individuals who are requesting the home loan and these same individuals will be on the property title.

• Personal savings: Can be from funds in your bank account, your investments (non-RRSP-Registered Retirement Savings Plan), and even if applicable from bank accounts of a company you own (taux hypothecaire).

• RRSP: It is possible with the HPB (Home Buyer’s Plan) that the Canadian government initiated in 1990, to use your RRSP as a down payment for the purchase of property. It is important to know the regulations of HPB to make sure you are able to use this method - pret hypothecaire.

• Life insurance cash value: There are life insurance policies that have a savings piece attached to them that permit the policy holder to borrow against the cash value of the policy. These funds can then be used as a down payment on a home - pret hypothecaire.

• Refinancing: If a potential property buyer already owns another piece of property, he may be able to refinance that property and get additional funds from the refinancing. These funds can then be used as a down payment and they would not be considered a loan since it is the borrowers own assets being utilized.

• Collateral guarantee: In certain cases, you can use the equity in another property, whether or not it has a mortgage attached to it, to guarantee the purchase of another property. This is a complicated procedure that effectively creates a collateral guarantee on the other property - taux hypothecaire.

Most lenders will insist that the funds are in your possession for at least 90 days prior to depositing them as a down payment on a home. They have this condition in order to comply with the rules the government has imposed upon them to prevent money laundering.

This all tells us that if you have decided to save up your money in cash, your lender will have a problem with the down payment for the purchase of property.

Down payment from a gift

It often occurs that one receives a gift to be used as a down payment. This is acceptable, provided that the gift comes from a family member (spouse, child, parent, brother, sister, grandparent or sometimes an uncle or aunt) - hypotheque.

This kind of a gift has to be accompanied by a “gift letter”. This is a letter that stipulates that the money is a gift and not a loan that has to be repaid. (see this link for a blank gift letter you can use).

Most lenders insist that the gift funds are deposited into the bank account of the purchaser of the property prior to the processing of the mortgage application.

Down payments from other people or sources

Besides one’s own money or assets, or a gift from a relative, there are other, less used sources for a down payment on a property:

• A bank gift: By this we mean that the bank, in the guise of a no down payment mortgage, is giving you a gift of a down payment. The bank will give you the 5% or less that is required for the down payment. The bank considers the fact that it is not your down payment, and the interest rate on the mortgage will be a little higher to reflect this - taux hypothecaire.

• A loan: There are certainproducts that are insured by the CMHC that will allow the down payment for a property to come from the proceeds of a loan. This is a rare circumstance.

• RRSP loan following an HBP: In this type of strategy, you can have a small down payment for your mortgage even if you do not currently have any funds in an RRSP. You have to have the RRSP loan for 90 days, after which period it is then reimbursed by the HPB. The RRSP contribution gives you a tax refund which you then use for your down payment. In order to use this strategy, you have to start the RRSP loan before February, already have the negotiations for the purchase of the property in effect, and buy the property at the end of spring, or latest, at the beginning of the summer. If you feel that this may work for you, I’d advise you to contact a RRSP loan specialist.

•Sales price balance: The real estate market has been a “seller’s market” over the last few years, and so properties have been selling quickly. This means that a down payment in the form of a sales price balance is not needed. A sales price balance is a mechanism whereby the seller loans funds to the buyer (to encourage the purchase of the home). Banks generally accept a down payment that comes from a sales price balance. - hypotheque

What conclusions can we draw from this? You have to consider the down payment as one of the most important pieces of your mortgage. If you are unclear about how you can come up with a down payment, we would be happy to work with you to plan the strategy to find the funds for your down payment.

Gregory is an Accredited Mortgage Professional (AMP). To get more information on Home Loans rates - taux hypothecaire, please visit: Hypotheque | Mortgage