A common question when financing the purchase of a new home is whether or not a down payment can be borrowed. In simple terms, yes. However, it does add additional risks to the borrower such as higher interest rates, more extensive credit and employment checks, and shorter term mortgages which can prove to be difficult hurdles. For example, the additional fees with a borrowed down payment can add up to an additional 4% in mortgage insurance to be incorporated into your total repayment cost each month.
With an average down payment of 20%, saving that large sum in today’s economy can be extremely difficult. As an alternative to a cash down payment, first time home buyers may qualify for a borrowed down payment with what is known as a “high-ratio mortgage”. A high-ratio mortgage is when a buyer places a down payment of less than 20% of the purchase price of a home to hold their mortgage. Generally, a high ratio mortgage covers 95% of the purchase price, knocking down the remaining down payment to a mere 5% for the home buyer. However, with the high ratio mortgage comes the limitation of term length in comparison to the usual 25 year amortization period of a conventional mortgage.
Can I take the money from my RRSP?
While it can be tempting to dip into an RRSP in order to make ends meet for a down payment, there are more cons than pros.
The main downfall to borrowing money from your RRSP is the tax withholdings. With a rate varying province to province, ranging from 10% to 30%. This means that a financial institution can withhold a portion of your withdrawal and pay it to the government directly on your behalf. For example, if you wanted to borrow $25,000, the withholding tax at a hypothetical 30% would pay $7,500 directly to the government leaving you with only $17,500. With limitations on how much can be contributed to your RRSP each year, replacing the borrowed the money may not be possible, while also making quite a dent in your retirement savings.
The exception to that rule is the First Time Home Buyer’s Plan. First time home buyers in Ontario are permitted to borrow up to $25,000 from their RRSP in order make their down payment, with the stipulation that they are a first-time buyer or haven’t owned a home in over 5 years, and is also contingent on the borrower repaying the amount loaned within 15 years. Another downside to this approach is that you’re shortchanging your retirement savings and are missing out on up to 15 years of tax-sheltered growth.
When it comes to finding the funds for your down payment, the most important thing to remember when purchasing your dream home is to stay within what is affordable for you with your future in mind. Additional loans add additional risks, and qualifying for a mortgage doesn’t always equal being capable of carrying one.
If you have any questions as to which mortgage options are right for you, give me a call at 705-315-0516. I’m always happy to answers your questions and help you and your family make the right decision for you, right now.