Saving up for a down payment is one of the biggest challenges keeping people from achieving their goal of homeownership - but we have good news! There are many programs available for those who need help, especially people who are purchasing their first home.
But what about homeowners who have outgrown their current home or need to move? If all of your money is tied up in your current house but it's time to move up, there are several options that can give you the cash you need for a down payment on your new home as well.
How Much Do I Need?
In Alberta, the minimum amount you need to put down for a down payment is 5% of the value of the home, however the CMHC (Canada Mortgage and Housing Corporation) mandates that anyone putting down less than 20% must also pay mortgage insurance in case of a default on the loan.
In practical terms, this means that if you can afford to put down 20% up-front as a down payment, you will have smaller monthly mortgage payments which can save you a lot of money in the long-term. For this reason, a 20% down payment is ideal, but not necessarily essential.
What Are My Options?
Whether you're looking for your first home, or thinking about moving from your existing home, there are a number of avenues you can explore to find help with your down payment. These include:
An Unsecured Line of Credit (ULOC)
While you can't borrow the money for your down payment through 100% financing with a lender, you can still borrow down payment money from other sources. One of the most popular options for homeowners moving up to a new home is an unsecured line of credit (ULOC).
Mortgage insurers allow borrowers to get their 5% down payment from a ULOC, provided the credit line payment is considered in your total debt service (TDS) ratio by your lender. Mortgage lenders are even allowed to offer the ULOC.
As a ULOC is just a general-purpose loan, these rules will apply to both first-time buyers and those who already own a home.
A Home Equity Loan
Home equity is the difference between what you owe on your current mortgage and the home's market value. Using your current home's equity as a down payment on a new home has several advantages.
Home equity loans usually have low interest rates, but the loans are secured. This means if you fail to make payments, you can risk losing the home to foreclosure. You can usually only acquire a home equity line of credit (HELOC) before your current home is listed for sale.
Of course, because you need an existing home equity to apply for this loan, it doesn't apply to first-time buyers. But remember, as soon as you make your first mortgage payment you're building equity, so bear this in mind for a future move!
The First-time Home Buyers' Tax Credit
Also known as the HBTC, the First-Time Home Buyer's Tax Credit offers an income tax credit for the purchase of a qualifying home. The way the HBTC is calculated is by multiplying $5,000 by the lowest personal income tax rate for the year in which you bought the home.
In order to qualify for the HBTC, you must both:
- Buy a qualifying home with your spouse or common-law partner (where applicable); and
- Have not lived in a home owned by either you, your spouse, or common-law partner (where applicable) over the previous four years.
In other words, if you last lived in a home that you (and/or your spouse or common-law partner) owned more than five years ago, you can qualify for the HBTC even if the new home you are purchasing is not, technically, your first home.
For individuals with a recognized disability, or for individuals buying a home for a family member with a disability, you can qualify for the HBTC even if it's not your first home. In order to qualify, the new home must be specifically purchased in order to help the individual with the disability live in an environment better suited to their needs and care.
The HBTC is available for detached single-family homes, semi-detached houses, townhouses, duplexes, triplexes, condominiums, and apartments.
The Home Buyer's Plan
Often abbreviated as HBP, the Home Buyer's Plan allows you to withdraw up to $25,000 per year from a registered retirement savings plan (RRSP) in order to buy or build a home for yourself or someone with a disability.
In order to qualify for the HBP, you must:
- Be a first-time home buyer; and
- Have a written agreement to buy or build the home for yourself or for a family member with a disability.
Just as with the HBTC, a "first-time home buyer" is someone who has not lived in a home that they (or their spouse/common-law partner) owned for the past four years. You are allowed to withdraw up to $25,000 per calendar year. Be aware that the RRSP will not withhold tax from any withdrawn funds.
The rules of the HBP require that you begin making repayments to the RRSP on the second year after you withdrew the money. The HBP program allows you up to 15 years to repay the full amount back to your RRSP with no fees or penalties for early payments. Repayments do not affect any existing deduction limits.
A Bridge Loan
A bridge loan gives you funds for a short period of time until another source of funds is available. Bridge loans are often used by homeowners who want to buy a new home before their first home sells to finance the new purchase. Also known as a swing loan, this type of loan allows you to close on a new home purchase before you close on your current home.
Bridge loans are usually offered for a term of no more than 90 days with affordable interest rates, but they are more expensive than regular mortgages. If you can qualify for a mortgage, you can probably also qualify for a bridge loan.
A rent-to-own agreement can be an effective way to buy the home you want when you don't have enough for a down payment. With this type of rent agreement, you can make the purchase over a period of one to three years with a price locked in at the beginning.
It's very important to consider rental agreements very carefully, as problems can come up if you don't know what you're agreeing to. In most rent-to-own agreements, you sign an agreement with the legal owner of the home or a company that will purchase the home. For a fee, you acquire the right to buy the home later at a set price. You will pay rent each month plus an extra amount that goes toward your down payment. By the end of the contract, these extra payments will equal at least 5% of the purchase price and you can then apply for a CMHC mortgage.
If you decide to use a rent agreement, make sure any deposit amount paid toward the final purchase price of the home is held in a trust like a regular real estate transaction. Also, make sure you are dealing with a legitimate company or the correct owner of the property. Last, but certainly not least, get everything in writing. And we mean everything.
The GST New Housing Rebate
For home buyers in Alberta, the federal government offers a GST rebate for individuals buying a new home.
In order to qualify:
- You must buy a new home, build a new home, or substantially renovate (at least 90% of the interior is replaced) a home on land that you own or is leased for at least 20 years; and
- The new home must be your primary place of residence.
- The GST rebate program is only available for individuals, not corporations or partnerships.
In order to qualify, there are no paperwork or documentation requirements except for photocopies of invoices showing the vendor in question charged GST. You will have to fill out a form in order to gain back any GST you've paid. The Canada Revenue Agency asks that you keep all of your original invoices and documents for six years.
Currently, the rebate offered is 36% of the GST you paid when buying or building a qualifying home. The rebate can be up to $6,300 for homes valued at $350,000 or less. For homes valued between $350,000 and $450,000, there's a partial rebate available. For homes valued at more than $450,000, there is no rebate.
Due to the complexity, it may be advisable to consult a tax professional before filing the paperwork to get a GST rebate.
Mortgage Insurance Premiums
It's important to note that most of these options require borrowing the money you need for a down payment. Borrowing the 5% down payment can certainly be a good option if it gets you into a new home with the space and/or location you need. All CMHC loans with less than 20% down come with a default insurance premium that is factored into your mortgage payment. Homeowners who borrow their down payment need to pay an extra 0.25% premium on top of the standard 3.60% premium with 95% loan-to-value mortgages.
Other Ways to Save
Almost everyone will have to borrow money at some point to buy a new home. The good news is there are other ways you can save money to put towards a down payment that can help reduce the amount you'll need to borrow. Consider the following options to help make the process of saving for a down payment easier:
Make a Budget
You may have promised yourself you'd cut back, but it's easy to forget about budgeting your spending over time. If you have a written budget you consistently refer to, it can act as a reminder. Also, it will visually show you your savings so you can see your dedication paying off.
Download a free personal budget template and have both you and your partner use it. You can track how much each of you is spending and saving, and gradually get closer to meeting your down payment goal. Or if you're more technologically inclined, consider using a budgeting app such as Mint to keep track of your spending.
Once your budget sheet is ready, consider all the little areas you could save money on that you haven’t thought of in the past. Small changes like where you shop for groceries, not buying coffee, or packing a luck instead of eating out can make a huge difference. It may not seem like much on a day-to-day basis, but those little things can make for some huge savings in the long run.
On payday, make sure you pay yourself first and put away 15% of your cheque for your down payment goal. When this is done, you won’t notice much of a difference off the top of your cheque, but in the long run, it can really add up. Even just putting away as little as $200 every two weeks for a couple of years will give you almost $10,000. Consider using a Tax-Free Savings Account (TFSA) to put the money away where it can't be touched, and remember that it'll also be earning interest the whole time you're saving.
Getting in the habit of doing this is easy and won’t take a huge amount of effort on your part. Another trick can be used when you buy something on sale or at a discounted price – put away the amount you saved into your savings account or TSFA. This can add up over time and you'll be glad you put in the extra effort!
Consider Starting Smaller
If you're a first-time buyer and your dream home is going to require a hefty down payment that'll take several years to save for, you might consider starting with a smaller “starter home”, for instance, by purchasing a condominium. You'll immediately have your own place, and the money you pay monthly toward the mortgage will start building equity. When you’re ready to move, you can use this equity as part of the down payment.
Bear in mind that it’s still smart to keep saving up for a down payment on a bigger home even if you do purchase a starter home. You should also take a look at a mortgage amortization table to see how much of your home you will “own” after a few years. In those first few years of the mortgage, a big chunk of your monthly payment goes toward interest on the loan rather than toward the principal. If possible, paying a bit extra with your monthly payment will help you build equity more quickly.
Using these tips, getting the down payment you need for your new home may not be as challenging as you think. If you're considering borrowing money for a down payment, one of our preferred lenders will be happy to assist you and discuss your options. Once you start saving, you're one step closer to the home you deserve!
Originally posted August 22, 2016, updated December 3, 2018.