Can’t make a 20 per cent down payment? Here are your options

Are you planning on buying a home? If so, you likely already know the importance of saving up for your down payment. This upfront cost is essential in order to secure a mortgage and purchase a property, but it can also pose a challenge to many buyers. Saving such a large amount of money can be tricky, and for some buyers, contributing a full 20 per cent down payment feels impossible. What are your down payment options if you cannot put forward a 20 per cent deposit? Here’s what you need to know, and where to go from here.

Buy a less expensive home

Depending on the price of the home you buy, you may not need to contribute a full 20 per cent. A full 20 per cent is only required when the home is more than $1 million. Homes that are between $500,000 and $1 million require five per cent on the first $500,000 and 10 per cent on the rest. Homes below $500,000 only require five per cent total. 

This leaves you with the option to purchase a house that does not make you pay a 20 per cent down payment. Lower-cost homes can get you into the housing market sooner and allow you to start building equity faster. If you are a first-time buyer, it is especially important to consider this option. Your first home will likely not be your forever home. With that in mind, consider the possibility of buying a cheaper home now so you can build equity and move up in the future. 

The one thing to note about smaller down payments is that they come with mandatory mortgage default insurance. This is a fee that is designed to protect your lender in case you are unable to make your payments. This is often included in your monthly mortgage payments.  

Build up your savings

Of course, another option is to hold off on buying a home until you can contribute a 20 per cent down payment. If you are close to reaching your goal, for example, you can wait until you hit your mark before diving into the market. Some people want to contribute a 20 per cent deposit so they can avoid mortgage default insurance and secure a smaller mortgage. If this sounds like you, continuing to save until you have the funds is a good idea. 

If you are concerned about entering the housing market late or jumping in at a bad time in the future, don’t be! Everyone’s “right time” to buy is different. There is no timeline you should adhere to apart from what’s best for you. In terms of changing market conditions, it’s important to keep in mind that conditions can shift at any time. It’s hard to predict exactly where we will be in one year, five years, or 10 years. What we do know for certain is that we can help you navigate the process with confidence when the time comes, whenever that may be!

If you do not already make use of savings accounts offered by the government, now is the time. You can take advantage of a Tax-Free Savings Account (TFSA), a Registered Retirement Savings Plan (RRSP), or a First Home Savings Account (FHSA). These all have their own distinct traits, but can all offer financial assistance when buying a home. 

Take advantage of a gifted down payment 

An increasingly popular option for home buyers is turning to their parents for help. The “bank of Mom and Dad” is responsible for a majority of current home owners’ down payments. Gifted down payments are exactly what they sound like. As housing prices and the costs of living continue to grow, many parents are stepping in for their children by providing some or all of the funds needed for their down payment. This is the trickiest part of buying a home, and a growing number of people are relying on financial assistance. 

Do you have parents who are willing and able to support the costs of your down payment? If so, this is an option to consider. With the proper documentation, lenders will accept gifted down payments. The key point to know about this process is that the donor must acknowledge the money is a gift, and not a loan with repayment expectations. You will also need to provide proof of where the money came from, which typically means providing banking statements that show money leaving one account and entering another. If a gifted down payment is an option for you, we recommend taking advantage of it! This will help you enter the market quicker, and secure a larger down payment. 

Struggling with your down payment options and trying to find the right path for you? That’s where a mortgage broker comes in! The housing market can be confusing, and trying to understand your best next steps can be overwhelming. By working with a broker, you can feel comfortable knowing you are receiving the best advice that is tailored to your situation. We can help you choose a strategy that works for you and allows you to enter the housing market.

If you have any questions about your mortgage, give us a call at Centum Home Lenders! You can reach us at 506-854-6847, or get in touch with us here.