How much money should I designate for a down payment?
For most properties, you need a minimum of 5% down
payment towards the final purchase price. If you are
trying to raise the money at this time, you may want
to look at a variety of sources,
DOWN PAYMENT SOURCES
There are many sources of down payment funds available
to buyers if you are willing to think creatively. If
your own bank account isn't large enough or you want
to keep your account liquid, you have several other
options. You can arrange to receive a tax-free cash
gift from your parents (or others) documented by a "gift
letter" stating that no repayment is required (thus
your debt burden is not increased in the eyes of the
lender). Some lenders require you to use some of your
own money in addition to the gift.
If you are first time home-buyer or have owned previously,
but have rented for several years, you may be able to
use any RRSP investments to your benefit. RRSP funds
can be withdrawn tax-free in order to purchase a house.
Contact your banker or mortgage broker for more details
on this program.
Other options may include using your own business as
collateral, or working together with friends, family,
or investors as partners in return for equity in your
home; you can buy them out later.
A BIGGER DOWN PAYMENT ISN'T
NECESSARILY THE WAY TO GO
There are advantages and disadvantages to both large
and small down payments. Your choice should depend on
personal reasoning and your financial circumstances.
It is often thought that bigger is better when it comes
to the downpayment you should make on a house. In many
cases this might be true. However, the arithmetic will
differ from case to case. A larger down payment results
in smaller monthly payments, and a lower interest expense
for as long as you remain with the mortgage. This is
important for many homebuyers. The disadvantage of a
larger down payment is that your funds are no longer
liquid in case of an emergency.
You could be dollars ahead with the smaller down payment
if you put your available funds to work for you to earn
more than what the interest on the loan would cost.
The money might be put to more profitable use in your
business or practice. There is no clear rule about this,
except that it is worth the time to do some calculating.
Seek the help of your accountant or lender to determine
which is the better way to go. With a down payment of
less than 25% you
will incur additional monthly fees from CMHC mortgage
insurance, so this expense has to be factored in as
well.
