Many people struggle to accumulate the down payment needed for a first-time home purchase. If this situation applies to you, solutions exist, notwithstanding your meagre savings.
In Canada, buying a house without the 5% minimum down payment is impossible since banks and lenders aren’t obligated to offer you a mortgage loan. This means that for a $400,000, you must provide a $20,000 down payment. In the case of a $500,000 property, the amount must instead correspond to 10% of its value.
You may quickly feel overwhelmed by the size of the sum you must amass! Yet you may still be able to realize your dream of becoming a homeowner sooner than you think! Consider the following options.
Rent-to-Own
There exist on the housing market homes and condos for rent with the option to buy after a fixed period. This form of financing may interest those who don’t have a sufficient down payment. The tenant signs a contract in which they agree that a percentage of their monthly rent will be put towards the residence’s eventual purchase. The owner and tenant negotiate the lease’s term and conditions to each party’s satisfaction.
Withdraw From Your RRSPs
You have undoubtedly already heard of this possibility. It involves using the money you have contributed to your registered retirement savings plan (RRSP) as a down payment. It is in fact the only way to withdraw cash from an RRSP before retirement without paying tax. More specifically, the Home Buyers’ Plan (HBP) is a government program that allows buyers to put up to $35,000 from their RRSPs towards a first home purchase. A group of buyers looking to acquire a same property can also qualify for the program, so long as they’re all first-time homebuyers.
The amount withdrawn is exclusively used for the down payment and must be fully repaid within fifteen years. This means you must reimburse a portion of the amount every year by adding it to your taxable income. Any delay in making the minimum payments may result in tax-related penalties; however, the repayment period only begins two years following the initial withdrawal!
The HBP’s principal advantage is that the transferred sum is tax exempt, leaving you more cash in your pocket. Additionally, this option affects your taxable income: you may even receive a tax refund.
Get an RRSP Loan for an HBP
Do you not currently have an RRSP? You can still take advantage of the HBP program (see above) even if you don’t have a penny in your account! As a matter of fact, you can obtain an RRSP loan with your financial institution specifically to contribute to your RRSP, allowing you to use the HBP to purchase your home. But certain conditions apply: the loan must sit in your RRSP account for at least 90 days before it can be transferred.
Enter a Co-Ownership Agreement With People You Trust
More and more people are deciding to buy a property as co-owners! While this is most common with intergenerational homes, groups of friends or siblings are likewise taking the plunge. By pooling their resources, potential co-buyers have greater purchasing power as well as less difficulty amassing the required 5% down payment. Moreover, having combined salaries to cover mortgage payments also appeal to banking institutions as this reduces their risk.
Dip into a Family Member’s Mortgage
It’s a simple process but does entail some risk for one of the parties. The lender refinances a portion of the amount one party has already reimbursed for their property. This new loan serves as a down payment for the other party’s real estate purchase. The first property therefore becomes collateral as well as extra security for the lender should the new buyer fail to make their mortgage payments.
Choose a Municipality Seeking to Attract New Residents
Quebec is a vast province, and some municipalities, often in regions far from urban centres, are offering financial incentives to encourage more people to move there. Of course, homes in these towns are typically more affordable, making it easier for everyone to become a homeowner.
Some major cities have likewise set up home ownership programs, such as Québec City’s Accès Famille Québec program. If they meet certain conditions, buyers can receive financial assistance (to be used as a down payment) in the form of a no-interest, no-payment loan. The Ville the Montréal has its own home purchase assistance program. A buyer will receive between $5,000 and $15,000 for the acquisition of a new home. In the case of an existing residence, the buyer will have their real estate transfer tax reimbursed. Although several conditions apply, you may be eligible!
Despite all this, at a time of high mortgage interest rates such as ours, it may be prudent to hold off on signing a promise to purchase. Consult a financial expert to ensure you make a well-informed decision!