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25 Feb

Down Payment – Getting it right the first time

General

Posted by: Kim Lindsay

Down payment is an essential component of every application when purchasing property – minimum amount required AND verifying the source of the money.

The federal government has imposed strict rules (FINTRAC anti-money laundering and anti-terrorist financing regime) that ALL federally regulated banks and lending institutions must follow.  This legislation came into effect as an attempt to prevent unscrupulous individuals from using cash down payments when purchasing properties as an easy way to launder money.

Link to more info here: https://www.fintrac-canafe.gc.ca/fintrac-canafe/antimltf-eng

 

Most Common Down Payment Sources:

GIFT (from an immediate family member): if you are receiving any  portion of the down payment as a financial gift we will provide you with a gift letter to be signed by the individual(s) gifting the funds, as well as confirmation funds have been deposited to your account

SALE OF ANOTHER PROPERTY:  copy of the Sale Contract and Trust Ledger OR Statement of Adjustments & Disbursements (from your lawyer) to verify net sale proceeds

“OWN RESOURCES” if funds are coming from your chequing/savings account(s), Investments (RRSPs, TFSAs, mutual funds, stocks, bonds, etc.), or an accumulation of these accounts, we require a 90-day history (3 full months)

A common hesitation we hear from clients is about their bank statements, which obviously include a lot of personal details. We understand your concerns and have policies and procedures to make sure your privacy and personal information is protected.  On this note, we require unaltered bank statements; blacked out names, account numbers, or any other details are NOT acceptable and will be rejected by the lender.

TRANSFERRING FUNDS from one account to another; any large transfers or deposits will have to show a (90-day) history/source of where the money went and/or where it came from.

Large or unusual deposits need to be verified as an acceptable source for down payment:

  • Received a gift from an immediate family member? Easy, we’ll provide you with a gift letter to be signed by the individual who gave you the funds
  • Sold a vehicle? Easy, provide bill of sale
  • Tax refund from CRA?  Easy, provide Notice of Assessment confirming amount
  • Transfer from your TFSA to chequing account?  Easy, provide the 90-day history for the TFSA along with withdrawal
  • *CASH DEPOSITS* less than $1,000, fine, but cash deposits over $1,000 that you cannot provide confirmation for?  Lenders will ask for source of funds.  Money that is “under the mattress” could be a deal breaker.  Funds must be deposited into a Canadian account at least 90 days prior to you placing an offer on a property.  Please talk to us BEFORE making any deposits, we will guide you on how to handle this properly.

 

CONVENTIONAL vs HIGH RATIO MORTGAGE

If your down payment is LESS THAN 20% of the purchase price, your mortgage is considered a High Ratio / Insured. These mortgages require mortgage default insurance, and the insuring companies (CMHC, Genworth, or Canada Guaranty) charge an insurance premium which is added to and paid along with your mortgage.

If your down payment is 20% OR MORE of the purchase price, you will have a Conventional Mortgage, and mortgage default insurance is not required.

 

TRADITIONAL vs NON-TRADITIONAL DOWN PAYMENT

A traditional down payment comes from sources such as savings, RRSPs, the sale of a property, or a non-repayable financial gift from an immediate family member.

Planning on borrowing money from a friend, credit card, unsecured line of credit, or personal loan?  This is considered non-traditional down payment. Additional qualifying criteria applies, we need to know this up front.

 

RRSP / HOME BUYERS PLAN

Qualifying home buyers can withdraw up to $35,000 from their RRSPs to assist with the purchase of a home – tax-free and interest-free – as long as those funds are repaid into the RRSP over 15 years. If you do not repay the amount due for that year (i.e. $35,000 / 15 years = $2,333.33 per year), it will be added to your (taxable) income for that year.

If you buy a qualifying home together with your spouse or partner, each of you can withdraw up to $35,000. The funds are not required to be used only for the down payment, but for other purposes to assist in the purchase of a home.

 

FIRST-TIME HOME BUYER INCENTIVE PROGRAM

This program launched in September 2019 to help qualified first-time homebuyers reduce their monthly mortgage payments by offering additional 5% down payment for a purchase of a resale (existing) home or up to 10% additional down payment for purchase of a newly constructed home.  It is a shared-equity mortgage with the Government of Canada; the effect of the larger down payment is a smaller mortgage, and ultimately, lower monthly costs.  The homebuyer will have to repay the Incentive based on the property’s fair market value at the time of repayment – after 25 years OR when the property is sold, whichever comes first.  The government shares in both the upside and downside of the property value at time of repayment.

 

MONEY FROM OUTSIDE CANADA

Using funds from outside of Canada is acceptable, however, you need to have the money on deposit in a Canadian financial institution for at least 30 days before your closing/possession date.

 

CLOSING COSTS

In addition to your down payment, lenders want to see that you have additional funds available for closings costs; such items as land transfer tax*, legal fees, GST/HST-if required, property tax adjustments, and interest adjustments.  The general guideline for closing costs is 1.5% of the purchase price.

*We do not have land transfer taxes in Alberta and it is highly unlikely that your closing costs will actually be 1.5% of the purchase price.  But, keep in mind that this number is commonly used by lenders when accessing overall risk/fallback, and to approximate funds that they want to see, in addition to the down payment.

 

Please be upfront with your broker and discuss your down payment at the beginning – doing so will save everyone time and stress later in the process 😊