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How much money should I designate for a downpayment?

How much money should I designate for a downpayment?

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,

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 RRSP funds can be withdrawn tax-free in order to purchase a house.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. 

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.