Understanding Mortgage Down Payments

For many homebuyers, the down payment is the biggest hurdle to homeownership.

This is especially true for first-time buyers, who often have to scrimp and save for years to come up with the down payment needed for their purchase. The challenge has been exacerbated recently due to increasing home prices and rising interest rates.

Below, we’ll look at the most common sources of down payment funds, including what lenders require in each scenario.

According to recent  data from Mortgage Professionals Canada, the following were Canadians’ top sources of down payment funds in 2021.

This is the most common source of down payment funds and can include money that has been saved in various accounts, including chequing/savings accounts, Tax-Free Savings Accounts (TFSAs), GICs, stocks or other types of investments.

As of the first quarter of 2022, National Bank of Canada’s  Housing Affordability Monitor found it takes the average household over 80 months of saving (6.7 years at 10% of its pre-tax income) to come up with the minimum down payment required for an average-priced home ($771,407). That’s up from an average of 37.9 months, or three years, since 2000.

What lenders need: When using personal savings for all or part of your down payment, as a guide, lenders will require three full months of bank statements that show your name, account number, transactions over that time period and your balance history.

Gifted down payments, AKA the “Bank of Mom and Dad,” have made up an increasing share of down payment sources over the years.

According to a  research note released last fall by CIBC economist Benjamin Tal, the average amount of gifted down payments from parents to their children rose to $82,000 in 2021 from $52,000 in 2015. That’s an annual pace of growth of 9.7%, two percentage points faster than average house price inflation, Tal noted.

What lenders need: In most cases, lenders will require a gift letter signed by all parties declaring that the funds are indeed a gift. They will also need confirmation of the amount of the gift, proof of the source of funds, and personal details of those involved (names, addresses and relationship of the parties). It is not uncommon for lenders to restrict down payment gifting to immediate family members, such as a parent, grandparents, child, sibling or legal guardian.

First-time buyers can take advantage of the federal government’s Home Buyers’ Plan (HBP), which allows buyers to borrow up to $35,000 from the Registered Retirement Savings Plan (RRSP). This money can be borrowed tax-free as long as it’s repaid within 15 years.

What lenders need: When borrowing funds from an RRSP, lenders will require a copy of the completed Home Buyers’ Plan withdrawal form and a bank statement verifying the funds have been deposited into your bank account. Most will also require three months of RRSP statements, including your name, account number and the funds in question. Many will also require the funds to have been in your RRSP account for at least 90 days.

While the sources above are based on first-time buyers, existing homeowners who sell their home before purchasing a new one generally use the proceeds from the sale to fund all or part of their down payment.

What lenders need: In this case, lenders will require documentation proving the equity in the existing home is sufficient to cover the down payment on the next purchase. This can include your Agreement of Purchase and Sale, documentation showing the outstanding balance on the existing mortgage, the signed firm and binding sale agreement and some may require a statement of adjustment from the lawyer to confirm the proceeds.

No matter your source of down payment funds, our team can walk you through the requirements to ensure the process goes as smoothly as possible.