The minimum down payment for insured mortgages is 5% of the purchase price of the home. The amount of mortgage insurance (CMHC) decreases as the down payment increases. With a 20% down payment no mortgage insurance is required.
The Government eliminated 100% financing as an option for Canadian homebuyers. However, alternatives still do exist for buyers who haven't been able to save enough for the minimum 5% down payment. The following down payment options offer solutions for those who qualify.
Gifted Down Payment:
Lenders will allow the down payment to come from immediate family members (parents, grandparents or siblings) in the form of a gift. Parents or grandparents will often help a child or grandchild with their first home purchase without any expectation of repayment. The family member must fill out and sign a gift letter confirming that the funds are indeed gifted. If the money came from anyone else (ie: friend or co-worker), it would be treated as a loan since non-family members usually expect to be repaid at some point in the future.
Borrowed Down Payment:
If the homebuyer has sufficient income, the lender may allow the down payment to be borrowed as long as the payment is included in the total debt service ratio and total debt payments remain below a set percentage of income. Mortgage insurers charge a slightly higher premium to insure this type of mortgage.
'0' Down Payment - Cash Back Option:
There are two basic types of
cash back mortgages available to Canadian homebuyers. However, only one option allows you to purchase a home without a down payment. Under this scenario the lender sends the 5% down payment to your lawyer on closing. A credit score of 650+ is required for all applicants. The interest rate is higher over the term of the mortgage so that the lender can recoup the money they gave you for your down payment.
The higher interest rate applies to the net mortgage amount (after the down payment has been applied), so the effective rate is actually lower than the one that appears on your mortgage contract. With interest rates near all time lows the cash back rate is still very reasonable by historical standards and this type of mortgage has become increasingly popular with first time buyers.
Cash back mortgages allow people to purchase a home sooner, without having to save the required 5%. Choosing a cash back mortgage can be a wise decision, especially when interest rates and housing prices are rising. When this happens, house prices may actually go up by more than 5% in the time it takes you to save your down payment. If interest rates increase, your rate could also end up be higher than it would have been under a cash back scenario.
For more information on these Down Payment Options, please contact
- Janet MacDonald at 613-561-5047 or
- Colin Birkas at 613-929-7629 or
- Jeff Dillon at 613-453-3663 or
