I’m thinking of buying. Where can down payment come from?

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That’s right! We’re slowing headed into another buying season in Quebec. Many Quebecers and Canadians alike are contemplating the sale of their property or perhaps that first purchase. This blog entry will focus on the latter. First time home buyers are my favorite clients to work with. Maybe it’s the former teacher within me that’s speaking. There is so much information to share and areas to discuss. I often read the Globe & Mail, and I think the timing of Robert McLister’s article on down payments is important to share and review.

If you’re looking to buy a primary home, condo or duplex for yourself then you will still need a minimum of 5% down. So if you are looking to make a purchase, where can down payment originate from? Here is a down payment quick snapshot:

1. Many people like to tap into their RRSPs with the Home Buyer’s Plan (HBP). As a first time buyer you are permitted to use up to $25,000 per person. You have a 2 year grace period upon which your 3rd year you will need to reimburse 1/15 of your amount borrowed. Rob is very correct in that bank’s do not take into account that new future debt as part of their TDS calculation but also future debt planning. In other words think twice about using your RRSPs as many Canadians are having trouble repaying that loan.

2. Some folks with generous family members (parents, brother, sister, grandparents) provide down payments gifts. This remains fairly popular given the price of homes. Rob is right in that banks try to ensure that the cash is genuinely a gift rather than a loan. Something that is challenging to monitor after the purchase.

3. In my opinion, building up your personal savings is still the best way to create  down payment. Yes it is slow and old fashioned but less potential headaches later.

4. If you are pressed to buy and are low on down payment in certain circumstances banks will permit you to dip into your credit cards and personal line(s) of credit for the missing down payment. The banks refer to this as alternative sources of down payment. But Rob is correct to highlight that the borrower(s) must be well qualified, i.e. great credit, good job. Also, borrowing money towards your down payment has to make financial sense given the your overall indebtedness increases and that needs to be taken into account.

Once upon a time prior to 2012 mortgage changes, many people took advantage of the “cash-back mortgage” programs. In such cases, the bank would give your 5% down in exchange for paying a much higher 5 year fixed rate. Usually the bank of Canada posted rate. In essence, you self-finance the cash back. However the penalties for such mortgages should you sell or refinance are costly as you are expected to reimburse some or all of the original cash-back.  If you have such a mortgage, ride out your term before refinancing unless the penalties aren’t an issue.

I agree with Rob’s sentiment throughout his article in that buying a home without having  properly saved down payment and with having the right financial/mortgage plan is risky.

Mark Balcar is a mortgage broker with North East Mortgages and editor of http://www.montrealmortgageblogger.com/
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McLister, Robert “Canadians can still buy a house without saving their pennie” Published
Monday, Jan. 07 2013, The Globe & Mail.

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/canadians-can-still-buy-a-house-without-saving-their-pennies/article6970799/

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