Your down payment options: traditional vs. non-traditional

Are you planning a real estate purchase? Your down payment will be one of the most important aspects to consider. So, what options do you have? Should you provide a traditional or a non-traditional down payment?

You should know that the down payment is actually a portion of the purchase price of the property that you have to provide on your own. When accompanied by mortgage insurance, the minimum down payment required by financial institutions is generally 5%. Depending on your situation and the type of property purchased, however, it may be a larger proportion.

Since it can be several thousand dollars, finding this sum is not always easy. Fortunately, there are several ways to find the money. There are two main types of down payment: traditional and non-traditional.

Traditional down payments

The majority of real estate purchases are made with funds from a traditional source. Unlike non-traditional sources, they do not increase the buyer's level of indebtedness.

Personal Savings

This is probably the most common way to raise enough money for the down payment. Personal savings may include your bank account balance, your Tax-Free Savings Account (TFSA), and your investments.

Be aware, however, that withdrawing money from certain types of investments could result in a penalty. So, be sure to check with a tax expert beforehand so you don't get any unwelcome surprises.

In the majority of cases, the money used for your down payment must have been in the account for a minimum of 90 days.

Using Your RRSPs (HBP Program)

It is also possible to use some of the money accumulated in your RRSPs under the Home Buyers' Plan (HBP).

This government program allows you to withdraw up to $35,000 from your RRSPs ($70,000 for a couple) to use as a traditional down payment. This money is not taxed.

However, certain conditions apply:

• The property you want to acquire must be your principal residence within one year of its purchase;
• The money must have been deposited into the account at least 90 days before the withdrawal;
• You will have to repay the withdrawn funds over a maximum period of 15 years.

To participate in the program, you will need to complete Form T1036, which is available on the Canada Revenue Agency website.

Non-refundable gift from a relative

Your traditional down payment can also take the form of a non-refundable donation. This must come from an immediate family member or close relative. Again, proof that this money has been in the donor's bank account for 90 days may be required by the lending institution.

If you are considering this option, be aware that a notary can help you to outline the terms of the donation on paper. A letter of donation is often used to confirm that the funds have not been provided as a loan.

Gift of Equity

Although different from a cash donation, a gift of equity can also be used as a down payment for the purchase of a family home.

This type of donation essentially involves a parent selling their home to their child at a cost that is less than the market value of the property. The difference between the sale price and the value of the property is then deemed to be the amount of the down payment granted.

Other options

Of course, the options mentioned above are not the only types of traditional down payments accepted by banks when buying a house. It is also possible to use:

• Inheritance: you will obviously have to provide proof of this inheritance.
• Proceeds from the sale of a property: Profits from the sale of your home can be used as a down payment for the purchase of a new one.
• Rent to own: Rent to own allows you to accumulate, with the payment of rent, a down payment which you can then use to buy the property.

Non-traditional down payments

It should be noted that only borrowers with an excellent credit history are eligible for a non-traditional down payment.

In addition, some mortgage insurers, such as CMHC, will not agree to cover loans that are funded through a non-traditional source. The Commission announced this in a press release in the summer of 2020. Without insurance, the borrower must therefore pay a larger down payment (usually 20% of the purchase price of the property).

Personal loan

In some cases, it may be possible to get a personal loan or line of credit for your down payment. The funds available on your credit card can also be used.

However, this is a rarely-used option, and banks generally refuse this type of financing. After all, the purpose of the down payment is to show that you have sufficient financial resources to cover the cost of a property. Using credit to finance another project may therefore seem nonsensical.

Repayable loan from a relative

A loan offered by a friend or family member can also be used as a non-traditional down payment option. You will of course have to repay the loan according to the terms agreed upon beforehand.

Get help with your down payment and purchase

Since building up a sufficient down payment can be difficult, especially if you are using only your own savings, you shouldn't be afraid to seek out the financial assistance available to you.

Look first to your current municipality or the town you wish to buy in. There may be some programs available to help you become a homeowner in that area.

There are also many government programs, both provincial and federal. The HBP, mentioned earlier, is one of them. But there are also others, such as:

• Incentive to buy a first property (IAPP);
• First-Time Home Buyers' Tax Credits (CIAPH).

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