Down Payment Rules For Home Buyers

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Scott Boyd

April 23, 2018

Saving strategies

Down payments were introduced to provide stability to the mortgage market, and are a mandatory for all mortgages in Canada. In this Oaken Blog post, we’ll take a look at what you need to know about down payments when purchasing a new home. We’ll also review how the minimum down payment is calculated, as well as instances where mortgage loan insurance is required, and the rules governing “gifted” down payments.

Calculating a minimum down payment

When purchasing an owner-occupied property, the minimum down payment required is calculated as 5% of the first $500,000 of the purchase price, plus 10% of any amount greater than $500,000. To see how this works, consider a property with a $750,000 selling price. The minimum down payment in this case is $50,000, which is determined as follows:

5% of $500,000 =                       $25,000

10% of ($750,000-$500,000) =   $25,000

Total required down payment =   $50,000

Mortgage loan insurance

If you’re purchasing a new home with a down payment that’s less than 20% of the selling price, the resulting mortgage is classified as a “high-ratio” mortgage. In this case, your lender is taking on more risk to advance the loan. So to help protect the lender, and by extension the banking industry, your lender is required to insure your mortgage through a third party insurer, such as the Canada Mortgage and Housing Corporation (CMHC).

The cost to secure mortgage loan insurance is calculated as a percentage of the overall amount of the loan. As an example, for a loan with a down payment of just 8%, the current CMHC rate used to determine the premium is 4%. This means that for a mortgage of $500,000, it will cost an additional $20,000 over the life of the loan to insure it.

Because the federal government requires lenders to arrange mortgage insurance for all high-ratio loans, the lender must arrange for the insurance, and also pay the premium for it. Naturally, the lender then passes this cost on to the borrower as part of the mortgage repayment schedule. So for borrowers who can manage a down payment of at least 20%, thereby avoiding the need for mortgage insurance, the savings can be significant.

Gifted down payments

Coming up with a 20% down payment is obviously a challenge for many buyers, particularly in some of the country’s more expensive real estate markets. To deal with the rising cost of new homes, and the higher down payment required to purchase these homes, “gifted” down payments are becoming increasingly popular.

A gifted down payment is one where all, or at least some portion of it, is comprised of funds provided by a close family member in the form of a gift. This is more common with younger, first time home buyers who may otherwise find it difficult to save the minimum down payment.

However, in order to be approved, the provider of the funds must sign a declaration that the money has indeed been provided as a gift, and that there’s no requirement for the money to be repaid. Also, the borrower must provide evidence in the form of a bank statement that the money has been transferred to the borrower’s account.

Establishing the source of the down payment

With any down payment, and especially for those deemed a gift, lenders are required to verify the source of the down payment. This is not only to confirm that the funds are available as stated, but also to fulfill the lender’s obligation to ensure the funds are not derived from any form of criminal activity. This is required as part of Canada’s anti-money laundering (AML) initiatives, and the Proceeds of Crime and Terrorist Financing regulations.