Suggestions include help from the parents, reining in personal spending, taking advantage of a new $10,000 bonus, or borrowing from your RRSP
Saving money for a down payment, especially in British Columbia’s high-priced housing markets, is one of the biggest challenges that homeowners face, but mortgage experts say, it’s not impossible.
The minimum down payment new homeowners need is five per cent of a home’s purchase price, which can be particularly difficult to accumulate for those in the most need: young people, often with student debt and lifestyles that involve a lot of restaurant meals and going to movies once or twice a week.
“There are options,” said Chris Pughe, a mortgage broker with Verico Complete Mortgage Services.
For starters, there’s always Mom and Pop to help you on your way — Pughe said gifts from family members are one alternative.
She added buyers can borrow the down payment through a line of credit, personal loan or possibly cash advances against a credit card.
The caveat, she said, is the buyer would have to be able to afford to service the mortgage debt, pay property taxes and heating costs plus an additional payment on the borrowed funds.
As well, first-time buyers can tap into their RRSPs — an option not available to investors — as a way to get the necessary cash in hand.
Pughe said this is a popular option. Borrowers can withdraw up to $25,000 from their RRSP under the federal Home Buyers’ Plan without any tax being withheld, noting that it’s not just for first-time buyers.
“It’s as long as you haven’t been on title to anything for the last five years,” she said. “If it’s you and your spouse, it’s $50,000.
“But you have to repay it [in yearly instalments] into your RRSP over 15 years. If not, you pay tax on it.”
Pughe noted that purchasers can borrow money for the RRSP and get the tax saving for a down payment the same year, provided it stays as an RRSP for 90 days.
The provincial government’s new bonus for first-time buyers of new homes, which is a one-time refundable personal tax credit equal to five per cent of the purchase price of a home to a maximum of $10,000, can also be used to help with a down payment.
Pughe said some lenders have a cashback option that can be used against a down payment. “The clients have to take posted rates [not discounted] and some lenders will give you five per cent of the mortgage amount as cash back. On $400,000 that would be $20,000, the five-per-cent down payment that is required.”
However, she recommends against that option because borrowing costs are much higher than discounted rates.
One thing worth remembering, Pughe said, is that if clients have less than 20 per cent as a down payment, they have to prove that they have the five-per-cent down payment plus 1.5 per cent in closing costs.
Meanwhile, Ryan McKinley, mortgage development manager at Vancity in Vancouver, said “it would be nice to have a magic bullet,” but that the classic approach to saving up the down payment can “definitely be a challenge.”
McKinley believes one approach could be to set up an automatic transfer into a high interest savings account every month or every paycheque to save for a deposit.
Regarding parental help, McKinley said parents can use their own savings, investments or potentially the equity in their own home to help a child with a down payment.
They could also co-purchase a home with their children, he said, allowing the child “to get into the market, while concurrently being an investment for the parents.”