Sources of Mortgage Down Payment
Tuesday Sep 07th, 2021
The down payment is the amount you pay out of pocket to obtain a mortgage. As of today, the minimum down payment required in Canada for an owner-occupied property is 5% for purchases under $500,000 and 10% for the portion of a purchase above $500,000.
Usually, the minimum down payment for a rental property is 20%.
Banks no longer offer 0% down mortgages or 100% financing.
In an effort to curb mortgage fraud and prevent a meltdown that occurred with subprime mortgages in the USA in 2007, Canada implemented stricter lending guidelines to avoid fraudulent applications and curb mortgage defaults. Canadians require a minimum of 5% down payment, which shows lenders a good savings history and skin-in-the-game so to speak.
Lenders are also required to trace the source of the down payment for real estate under The Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Any deposit into your account within 90 days must be supported with documentation as to where it came from to make sure it is legal. Usually, lenders will want to see an accumulated proof of savings in a bank account, not just a lump sum deposited a few days before the mortgage application unless you can prove it came from an allowable source.
Possible sources of down payment are as follows:
Savings You will have to show accumulated savings in your account for the last 90 days. You may be required to show bank statements that show your name and account number. Large deposits will have to be explained and history from each account being used will have to be demonstrated.
RRSP/TFSA/Investment Accounts Again statements showing your name and account will have to be provided. Up to $25,000 per applicant of RRSP savings can be used. It should be in your account for at least 90 days before closing to avoid tax withholdings.
Gift Some lenders will allow all or a portion of the down payment to come from a gift (gifted down payment) this is not a loan to be repaid later. A gift letter is required signed by the person or people providing the gift and you and anyone else receiving the gift stating that the money does not have to be repaid. You will also have to provide a copy of the cheque used for the gift and proof of the deposit in the bank account.
Sale of Property If you are using the proceeds from the sale of another home, you will have to provide a copy of the signed Agreement of Purchase and Sale. All the conditions in the Agreement of Purchase and Sale must be fulfilled.
Divorce Settlement You will have to provide a copy of the divorce settlement and proof of deposit of funds. If a lawyer holds the money in trust, a letter from the lawyer will be required.
Inheritance Proof of inheritance in writing as well as a proof of deposit.
Sale of Vehicle or other Asset Bill of Sale, copy of your old registration, and proof of deposit
Home Equity Line of Credit (HELOC) Details of the HELOC, mortgage details as well as the address and title of the property may need to be provided.
Line of Credit or Personal Loan Proof of these funds and details of the loan will need to be provided.
WARNING 1 To avoid violating the Money Laundering Act, any amounts of unexplained cash must be deposited in an account and “aged” for at least 90 days.
WARNING 2 In the United States, sellers can provide financial assistance to the buyers in the way of cash incentives towards a down payment and closing costs. You may have seen this tactic on home buying shows on TLC or HGTV. This is not allowed in Ontario. Sellers can provide monetary incentives to improve the value of a home such as $1000 for the purchase of a new refrigerator or cover repairs such as the cost of a new furnace.