Cash poor…Can you still afford to buy a
By GoldenGirlFinance.com | Thu, 7 Mar, 2013 12
All of the recent changes to Canadian mortgage rules make it pretty clear: Regulators
want to dissuade
first-time homebuyers from purchasing a property with nothing down.
Yet, despite changes that did away with 100 percent financing back in 2008, and the
recent barring of cash-back mortgages by the Canada Mortgage and Housing Corp.,
buyers can still manage to take a step up the real estate ladder with little upfront cash.
The question is - does it make financial sense?
Let’s weigh the options….
Why it's best to have a robust down payment
While saving for a sizable down payment can be a huge financial burden, it's an
investment that can save you a considerable amount of cash in the long run. Remember –
the smaller your down payment, the riskier you look to a bank. Low down payment home
mortgages require more leverage, and high leverage borrowers are open to a substantially
higher risk of bankruptcy.
While larger down payments inherently help lenders, they also benefit borrowers in a
variety of ways. This is especially true for buyers who are planning to sell in the early
years of their residential mortgage. With the recommended 20 percent down payment,
you'll generally have enough equity built in to your property to cover closing costs, even
if there has been a 10 percent decline in the market value of the home.
Alternative down payment options
Coming up with tens of thousands of dollars for a down payment isn't always an option,
especially when you're a young, first-time homebuyer. Houses are expensive - no ifs,
ands or buts about it! At a time when the average Canadian home price hovers around
$356,000, the Canadian Association of Accredited Mortgage Professionals has found that
more than one-fifth of all renters have less than $5,000 put away for a down payment.
So what's a cash-poor house hunter to do?
For many, the answer is to seek out an alternative down payment source.
Borrowing from nontraditional sources
When buying a home in Canada, you generally need a minimum down payment of 5
percent of the purchase price of the home. It's worth noting at this point that legislation
prohibits you from borrowing that 5 percent from your mortgage lender
if that lender is a
bank or federal trust company.
However, you're free to borrow your down payment from a number of different credit
sources. Popular choices include a line of credit, personal loan, or even a credit card. Of
course, tossing your down payment onto your VISA isn't the most responsible way to
manage your investment (don’t do it!).
If you're thinking about borrowing your down payment, get ready for some serious
interest charges. More often than not, the interest rate on a borrowed down payment will
be much higher than that on your mortgage, or have a riskier variable rate, at the very
The cash-back option
It's worth noting that any lender who isn't federally regulated (like a credit union, for
example) can still offer cash-back down payment mortgage products. Not surprisingly,
the interest rates on these offers are astronomical. Homebuyers are also required to come
up with the cash for
closing costs, including legal and inspection fees, as well as land
transfer taxes, and other fees.
Be wary: There's speculation that the loophole that enables some institutions to offer this
product will be eliminated in 2013 through new mortgage insurer and/or provincial
The RRSP Home Buyers’ Plan
First-time homebuyers are encouraged to take advantage of the government's Home
Buyers’ Plan (HBP) in order to draw upwards of $25,000 from their RRSPs in order to
fund their down payment. And while this is a great option, it comes with a few red flags.
First, draining your retirement savings in your 20s and 30s means you'll risk losing years
of tax-deferred investment gains. Secondly, any installments that aren't paid back before
the deadline are taxed as income on that year's income tax statement. Statistics show that
as many as one-quarter of HBP participants miss or underpay on an installment.
Going with a gifted down payment
Generous relatives are often willing to help fund a down payment through a financial gift
to a first-time homebuyer. In most cases, however, lenders will only consider gifted down
payments from a parent, grandparent or sibling.
It's important to note that a "gifted" down payment is very different from a personal loan
from a relative. With a gift, there's no expectation to pay the relative back. If you're
borrowing money from a relative in order to make ends meet, this is not a gift. It's an
additional liability that your lender will need to consider as it increases a borrower's debt
Proceed with caution & get advice
When it comes to buying a house with someone else's money, always remember to be
careful. Just because you qualify for a cash-back mortgage or have enough squirreled
away in your RRSP doesn't mean you're ready to shoulder the
responsibilities of a
. Talk with an accredited mortgage broker and your trusted financial advisors
before you make your final financing decisions.
is a free personal finance and education site for women.
Nothing contained herein is intended to provide personalized financial, legal or tax
advice. Before implementing any financial strategy, you should obtain information and
advice from your financial, legal and/or tax advisers who are fully aware of your
Kevin & Faye Kitzman
Remax Real Estate Centre
Direct : 519-577-0603