Down payment options when purchasing a home

An important consideration for home buyers is the down payment they need to prepare for a home purchase.

A down payment is one of the initial costs you’ll have to pay upfront when purchasing a home. It’s the percentage of your house price that is not covered by a mortgage lender and needs to be provided from other sources.

You may have been preparing your down payment for a while now. The good news is, there are few down payment options out there that you can consider. They include the following:

First Home Savings Account (FHSA)

If you're a first-time homebuyer, you can open a First Home Savings Account (FHSA) to start saving for a down payment. The FHSA has the benefits of both an RRSP and TFSA, which allows you to have contributions that are tax deductible and any qualifying withdrawals from the account for a qualifying home purchase are tax free. You can contribute an annual tax-deductible amount of up to $8,000 with a lifetime contribution of $40,000 per person. Just like an RRSP and TFSA, you can invest and hold different investment securities inside an FHSA, making it a great tool to save for a future home purchase.

Here are other key information about the FHSA:

• You must be a first time home buyer at the time you make the withdrawal. This means that you cannot have owned a home, in any part of the calendar year before the withdrawal or in the past four calendar years.
• You can carry forward any unused contribution in the subsequent year up to a maximum of $8,000 per year on top of the contribution limit of $8,000. The carry-forward amounts begin to accumulate only after you open your FHSA.
• You can transfer funds from an FHSA to another FHSA account, RRSP or a RRIF tax free. When you transfer from an FHSA to an RRSP or RRIF, the transfer will not reduce, or be limited by, your available RRSP contribution or restore your FHSA annual contribution limit.
• You don’t need to pay back the withdrawn money from an FHSA, compared to the RRSP Home Buyers’ Plan.

Home Buyers' Plan

If you're a first-time home buyer, you may be eligible for the Government of Canada’s Home Buyer’s Plan (HBP). The HBP allows individuals to borrow up to $60,000 (or $120,000 with a spouse or common-law partner) from an RRSP (Registered Retirement Savings Plan).

It is tax-free when you withdraw under Home Buyers' Plan but you have up to 15 years to pay it back into your RRSP. Repayments begin in the fifth year after the year in which you withdraw the funds (if the funds are withdrawn between January 1, 2022 and December 31, 2025). For example, if you’re withdrawing $120,000 from your Home Buyers’ Plan this year, in five years you’ll have to start repayment of a minimum of $8,000 ($120,000 / 15 years = $8,000) each year.

To be considered a first-time home buyer, neither you or your spouse or common-law partner could have owned and occupied a home in the four-year period before a home purchase. If you've owned a home before, you can still be considered a first-time home buyer as long as you have not owned and occupied a home in the four-year period.

The four-year period starts on January 1, four years before the year you withdraw from your RRSP, and ends 31 days before the date you withdraw those funds. Let’s say you are withdrawing your down payment funds on August 31, 2022. Simply count 31 days backwards (July 31, 2022) for the end of the period and then count 4 years back (to January 1, 2018) for the start of the period. This also means that you nor your spouse or common-law partner should be on title on any property from January 1, 2018 to July 31, 2022. If one of you owned a property however in that period, you won’t be eligible for the Home Buyers’ Plan while the other can.

To learn more about other eligibility requirements for HBP, please check this article from the Government of Canada.

Note that you must hold an RRSP contribution in your RRSP account for at least 90 days before you can withdraw under HBP.

If you qualify and wish to know the next steps with participating in the Home Buyers’ Plan, please check this helpful article.

Personal savings or investments

Personal savings may be one of the most conventional ways of getting your down payment. Some people hold their savings in a high-interest savings account with a bank while others hold a TFSA (Tax-Free Savings Account) carrying different types of investments.

A TFSA is an alternative option when it comes to saving for a down payment as it retains the flexibility of withdrawing funds tax-free. Moreover, any investment under a TFSA is non-taxable (for capital gains and dividends with some exceptions). When people save a down payment under a TFSA, they typically hold low volatility investments. Examples of these can include bonds or other fixed income assets which offer some protection in market downturns. While this may look different from person to person, it’s always important to consider your time horizon when investing before a home purchase.

For verification of down payment in any savings or registered accounts, it’s best practice to hold the money in the account for at least 90 days before you can withdraw it for a down payment.

Gifted funds from family members

A financial “gift” for a down payment is another option for many buyers. These are funds that come from immediate family members and are not subject to tax. Immediate family members can be your parents, grandparents, or siblings.

In most instances, there’s no limit on how much you can receive as a financial gift. As a general rule, you need to submit a gift letter when making a down payment with gifted funds.

A gift letter is a document that borrowers and donors (the immediate family members gifting the funds) sign to ensure that the donors are helping the borrowers with the down payment via a gift and not lending the money. Common information in gift letters includes the names of the borrower and donors, the donors’ relationship to the borrower, date of the gift, and gift amount.

When you’re preparing a gift letter, it should include a signed statement highlighting that the money is a gift and there’s no obligation to repay it back to the donors.

Please note: Be prepared to provide a bank statement showing that the gifted funds are in your (the borrower’s) account for at least 15 days before the closing date of the purchase of your home.

Home sale proceeds

If you’re an existing home owner, you can use your home sale proceeds as part of a down payment. You can use all or part of the down payment from the sale proceeds as long as you provide certain documentation to verify the selling of your home.

This documentation may include:

• Agreement of Purchase and Sale
• Mortgage statement (if you still have a mortgage on the property)
• Statement of adjustment from a lawyer
• Bank statement (to show deposited funds after the sale)

To know more about other documents that you’d need to prepare for a mortgage application, please check our helpful article here.

The information in this blog is for informational purposes only and should not be used or construed as real-estate, mortgage, financial or investment advice.

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