Which Mortgage Down Payment Option Is Right For You?

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Before you can decide which mortgages for first time home buyers are right for you, you must first learn what your different mortgage down payment options are. With so many different sources of funding available, purchasing a home has never been easier.

A down payment is defined as the percentage of a home’s purchase price that you must provide yourself. The balance is supplemented by a financial institution or private lender in the form of a mortgage. The monetary amount of your down payment, which represents the amount of initial equity you have in your home, should be determined before you begin shopping for homes.

The Conventional Mortgage

A conventional mortgage requires you to provide a minimum down payment of 20% and is available in either variable interest rate or fixed interest rate options. Because conventional mortgages do not have to be insured against default, they have the lowest carrying costs.

The Low Down Payment Insured Mortgage

Most Canadian lenders now offer insured mortgages for first time home buyers, which have lower down payment requirements. The requirement may be as low as 5%; however, this type of mortgage must be insured to cover the possibility of defaulting on payments. Their carrying cost are considerably higher when compared to conventional mortgages because their cost includes insurance premiums.

How an RRSP Can Be Used as a Down Payment

The federal government offers a Home Buyer’s Plan for first time home buyers in which they are eligible to utilize up to $25,000.00 per person in RRSP savings as a down payment on a home. Withdrawing these funds is not taxable so long as it is repaid within a 15 year time period. In order to qualify for the plan, the RRSP funds you choose to use must have been in your RRSP for a minimum of 90 days.

Even if you have already saved enough funds for a down payment on a home, it could make financial sense for you to access your RRSP savings through this plan. For example, if you have managed to save $20,000.00 for a down payment, and assuming that your RRSP contains enough “contribution room” for a deposit of that amount, your savings could be transferred into your RRSP a minimum of 90 days before your closing date. You can then simply withdraw the monetary funds via the Home Buyer’s Plan.

What is the advantage of doing this? Your $20,000.00 RRSP deposit can be counted as a tax deduction for this year. Your tax refund can then be used to pay other expenses related to purchasing your home or to repay your RRSP. However, be aware that any funds you “borrow” from your RRSP will not ear the tax sheltered returns it would be entitled to if it was left in your account. Before making a decision, you should consult with a financial planner to determine if this tactic is right for you.

Regardless of which mortgage option you choose, or the size of your down payment, make sure to set aside enough funds to cover the cost of a home inspection, moving, closing costs, and other expenses that might arise.