Acceptable Down Payment Sources for Your Mortgage
In part two of our down payment blog series, we'll look at the various sources you can tap into for your down payment. This section is about exploring different ways to gather the funds you need for the down payment on your dream home. Knowing where your down payment can come from is crucial because it helps smooth your home-buying process and ensures you're ready and well-informed about your options. So, let's dive in and discover the different channels you can use to build up your down payment, helping you prepare for your home purchase in a smart and informed way.
Home Buyers Plan (HBP): The HBP allows you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) for your down payment. While you can withdraw funds tax-free, they must be repaid within 15 years to avoid taxation. To qualify for the HBP, you must be a first-time homebuyer, have a written agreement to buy or build a qualifying home, be a Canadian resident during the withdrawal, and plan to live in the home within a year of purchase or construction.
Tax-Free First Home Savings Account: Launched in 2023, this account lets Canadians save up to $8,000 yearly, with a total limit of $40,000, for their first home purchase. Contributions reduce your taxable income, and earnings grow tax-free. Unlike the HBP, you won't need to repay withdrawals.
TFSA and Savings: Using funds from your savings is straightforward, but remember that withdrawing from investments may incur capital gains tax. Withdrawals from your RRSP are taxed unless made under the HBP.
Gifted Down Payments: Immediate family members can gift you down payment funds. If the gift comes from an extended family member, consult your mortgage broker for the best approach. The donor must sign a letter stating the gift's details and that it's not repayable. Lenders might require 30 days of bank statements from the donor.
Borrowed Down Payments – Credit: While you can use borrowed funds like a credit card or line of credit for your down payment, it increases your debts and can affect your Total Debt Servicing (TDS) Ratio, impacting your mortgage qualification.
Money from Overseas: Using funds from a foreign account is allowed, but the money must be in a Canadian account 90 days before closing. Provide the lender with the wire transfer form and a 90-day history of the foreign account.
Incentives: The First-Time Home Buyer Incentive offers an interest-free shared equity mortgage of 5% or 10% of the home's purchase price. This can be a valuable addition to your down payment.
Existing Equity: You can use equity from a refinance, a buy and sell situation, or a reverse mortgage for your down payment.
Understanding your down payment sources and having the necessary documentation is key to a smooth mortgage process. Remember, your down payment affects your mortgage costs and terms, so choose wisely and consult a mortgage broker.
Stay Tuned for Part 3 - Guide to Verifying Your Down Payment …