As a mortgage broker, I often get asked by prospective homebuyers about the various ways to come up with a down payment. To address these questions, I’ve put together an overview of some of the more common strategies that can help you take that critical first step toward homeownership.
Leveraging the RRSP Home Buyers’ Plan
The RRSP Home Buyers’ Plan (HBP) is a great option for those who have been contributing to their Registered Retirement Savings Plan (RRSP). This plan allows you to withdraw funds tax-free, provided that you repay the amount within 15 years. Essentially, it’s a way to use your own savings without triggering any tax penalties.
For instance, say you contribute $20,000 to your RRSP, you may receive a tax refund, depending on your income level and tax bracket. Let’s assume this $20,000 gets you a $7,000 refund. When you’re ready to buy, you can withdraw the $20,000 tax-free, in addition to the tax refund you received. This effectively gives you a larger sum to put toward your down payment.
While the exact refund varies based on individual circumstances, this example shows you how you can leverage your RRSP savings in a strategic way.
Gifted Down Payments
Another increasingly popular option is receiving a down payment as a gift from a close family member, such as a parent. With rising home prices, many parents are stepping in to help their children make their homeownership dreams a reality. Lenders generally accept this arrangement, as long as the funds are properly documented as a gift. This can significantly reduce the time it takes to save for a down payment and help you move into your home sooner.
Refinancing or Accessing Your Home Equity
For homeowners looking to invest in additional properties, refinancing your current mortgage or tapping into your Home Equity Line of Credit (HELOC) are viable options. By doing so, you can unlock the equity in your existing property and put that money toward a new investment. This approach is particularly useful if your current savings are tied up in investments or other assets that are generating returns, such as stock dividends or high-interest savings accounts.
Insured Mortgages
An insured mortgage is another popular option, especially for buyers who may not have a large down payment saved. With this type of mortgage, you can purchase a home with as little as 5% down, although there are some requirements to meet. One of the main benefits is access to lower interest rates, but it’s important to note that you’ll have to pay a mortgage insurance premium. This premium is added to your mortgage payments and amortized over the life of your mortgage, allowing you to spread out the cost.
Budgeting and Side Hustles
Lastly, one of the simplest yet most effective ways to save for a down payment is by cutting back on non-essential expenses and finding additional sources of income. Whether it’s freelancing, offering a service, or participating in the gig economy, taking on a side hustle can provide a financial boost. By saving all the earnings from your side job, you can build your down payment fund faster than through savings alone.
Final Thoughts
I hope these tips have given you some insights into how to approach your down payment. There are multiple pathways to homeownership, and finding the right one for you depends on your financial situation and long-term goals. If you have any questions or would like further guidance, please don’t hesitate to reach out. I’m here to help!
