How much money do I need to buy a home? Where can the funds for my down payment come from?
Your down payment is one of the three main pillars that supports your mortgage application. It represents the equity you will put into the property you're buying and determines how much money you will need to borrow from a mortgage lender.
How Much Will I Need For My Down Payment?
The Canadian government has laid out the guidelines for a minimum down payment as follows:
- For a purchase price of $500,000 or less, at least 5% of the purchase price.
- For a purchase price of $500,001 to $999,999, at least 5% of the first $500,000 + 10% for the portion of the purchase price above $500,000.
- For a purchase price of $1 million or more, at least 20% of the purchase price.
These guidelines apply to anyone who is purchasing a home in Canada, even if you already own a home, are self-employed (with a 2-year history of provable income), or have recently immigrated.
If you are buying a property where GST applies – generally a new build – the GST forms part of the purchase price. For example, if you were looking at a new condo in Victoria listed at $499,000 + GST, the purchase price would be $523,950. The down payment required would be 5% of the first $500,000 (= $25,000) PLUS 10% of the price above that, or $23,950 (= $2,395) for a TOTAL of $27,395.
When you are looking at a property of $1 million or more, many lenders also scale property values. That means they have a maximum loan amount they will give for each tier of property value, which could mean that you need a greater percentage of the purchase price for your down payment.
Buying a rental property always requires at least 20% of the purchase price as your down payment.
Where Can The Money For My Down Payment Come From?
There are a few sources you can use for your down payment:
- Your savings
- Government incentives & programs
- Equity in an existing property
- Borrowed money or "flex equity"
As part of your mortgage application the lender will require documents to verify the down payment source and amount.
This might be cash in a savings account, but it can also be investments – your TFSA, RRSP, or other stocks, bonds, and funds. Lenders generally verify any down payment amount from your savings by using bank or investment statements.
A gift from an immediate family member is an increasingly common source for a down payment, especially for first time homebuyers. It's possible to qualify for a mortgage even if your entire down payment is gifted to you, but it's important to ensure that your monthly cash flow will support the mortgage payments. Each lender has their own requirements for a gift letter that your family will need to sign as part of the mortgage process.
Government incentives & programs
There are programs at all levels of government (municipal, provincial, federal) that may assist with your down payment. Most incentives require you to have some funds of your own to contribute. They also generally have qualifying criteria and an application that is separate from applying with a lender. If you are interested in leveraging an incentive program, let us know and our team will take that into account when reviewing your options.
Equity in an existing property
If you already own a property and you've built up enough equity in it, you may be able to access that equity for your down payment. What do we mean by 'enough'?
If you were going to sell your existing home and use the proceeds from the sale as your new down payment, we would work with the actual amount of money you will have left after legal and real estate fees as the down payment.
If you wanted to keep your existing home to turn it into a rental property and move into your new purchase, we would look at a refinance to unlock your equity; however, that depends on having at least 21% of your property's value in equity since the maximum loan-to-value (LTV) for a refinance is 80%. Let's look at two examples:
- Purchased a $500,000 condo 2 years ago with a high-ratio/insured mortgage and a down payment of $25,000 (LTV 95%). Mortgage insurance premiums bring the loan amount up to $494,000.
- Condo is now assessed at $600,000, plus regular mortgage payments have been made so that you have an additional $30,000 of equity.
- The LTV is now 77.3%, so you would potentially be able to refinance back up to 80% and leverage $16,000 of the equity in your home. However, since you likely would be breaking your existing mortgage term we'd have to look at what penalties you would face, as well as the additional costs (appraisal, legal) associated with the refinance to ensure that it would meet your goals.
- Purchased a $750,000 single-family home 5 years ago with a conventional mortgage and a down payment of $150,000 (LTV 80%).
- Home is now assessed at $1,200,000, plus regular mortgage payments have been made so that you have an additional $75,000 of equity.
- The LTV is now 43.8%, so you would potentially be able to refinance back up to 80% and leverage $435,000 of the equity in your home. Since you are near the end of your existing mortgage term, we would try to have the dates line up as closely as possible to avoid or minimize any penalty you would face.
Does that seem like a lot of calculations? Let our team do the math for you! As long as you have your property and mortgage details handy, we can let you know whether the equity available to you would be enough for the down payment on a new property.
Borrowed money or "flex equity"
Flex equity allows you to borrow your down payment through a variety of sources including a line of credit, a credit card, or a personal loan. If your debt service ratios work – meaning you can carry the payment for the borrowed money in addition to your mortgage – some lenders will consider this source of funds. With this option more than any other your budget is of the utmost importance. Since you're going to be making multiple payments, you need to make sure that will work for your cash flow.
Who does this make sense for? Let's say you're a grad student and your earning power is about to start ramping up. However, you don't want to pay rent for the next few years until you save up a down payment. If you have stellar credit, strong cash flow, and a good debt service ratio this might be the right fit. Your mortgage broker can help you figure out whether it's an option for your situation.
There's a lot to know about how much of a down payment you will need for your next property purchase and where that money can come from. When you choose to work with the Auxilium Team, we do the math for you to make sure your down payment will support your mortgage application for the home you want to buy.
If that sounds like the service you want for your mortgage financing, start a conversation with us today. Fill out our contact form or give us a call at 250-590-6520 (toll-free 1-855-590-6520) to see how we can find the best solution for your situation.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.
This post reflects the best available information at the time of writing/last update. In order to ensure that you have the most up-to-date information, contact us to confirm the details for your specific situation.