The downpayment on a home need only be 5% of the purchase price (ie
$5,000 down on a $100,000 purchase). This 5% cannot be borrowed unless
it's from your RRSP, or against an identifiable asset. The downpayment
may be:
a) cash accumulated in your bank account over at least
the last three months.
Lump sums deposited to that account within the last three months
may be queried.
b) A gift from an immediate relative (mother, father, sister,
brother). A letter from the benefactor must accompany the gift,
as well as a copy of the gift cheque. This letter must indicate that
the money is indeed a gift and that it does not have to be repaid.
If it is a gift, it must be in your bank account when you apply for
the mortgage.
c) A loan from your RRSP (if the vehicle that has your RRSP will
allow it). This loan must be repaid to your RRSP over
the next 15 years in equal yearly payments of principal. Should
you forget to repay in any particular year, that amount of
money will be added to your taxable income.
d) A loan against an asset such as car, boat, bonds, term deposits
etc. as long as the lending institution granting the loan is
prepared to acknowledge that they are "fully secured", and that the
payments on this loan are indeed being shown on your application,
and calculated in your debt service ratios.
e) Accumulated cash in a true Rent-To-Own (RTO) agreement.
A true RTO means that during the period of rental, the
tenant/purchaser is indeed paying market rent, and over and above
the rent payment, is paying the Vendor a certain identifiable amount
of money that the Vendor is holding "in trust" as accumulated down
payment. This is probably the most scrutinized area of downpayment.
With the exception of RTO, the downpayment is given to the Vendor on the day you actually buy the home (called the "possession date") through your lawyer. This money coupled with the mortgage money should account for the full purchase price. With the RTO, the Vendor declares (on what is called the Statement of Adjustments) that he/she has received the downpayment through accumulation of "in trust" amounts over the rental period.
If your downpayment is more than 5% of the purchase price but less than 25% of the purchase price, you require what is termed a "high ratio" mortgage. If your downpayment exceeds 25%, then you require a "conventional" mortgage.
The High Ratio Mortgage can be obtained through any financial institution but must be "insured against default" through Canada Mortgage and Housing Corporation or G.E.Capital Corp. (GEC). No lending institution in Canada that takes in deposits from the Consumer may lend money beyond 75% of the purchase price of the property without this insurance coverage. High ratio insurance is not life insurance, nor is it disability insurance, it is simply insurance to protect the lender in case you should happen to default (it has also been called "default" insurance). All insurance companies charge premiums, including CMHC and GEC. The premium depends on the "loan to value ratio" (that's the amount of mortgage versus the value of the property). The more the downpayment, the less the risk therefore, for 90.1% to 95% financing, the premium is 3.75% of the mortgage amount ($3750 on a $100,000 mortgage); 85.1% to 90% financing, the premium is 2.5% of the loan amount ($2500 on a $100,000 mortgage), 2.0% premium from 80.1% to 85% financing, and 1.25% premium from 75.1 to 80% financing. Below 75% financing need not be covered by CMHC or GEC. The insurance premium can be added to the mortgage or paid in cash, thus avoiding interest on the premium. In other words, a $100,000 mortgage (being let's say 90% financing) would be registered as $102,500 mortgage if the ($2500) premium was added. You would end up paying interest on the whole amount. Your lending institution would then give $100,000 to your lawyer to pay the Vendor and give $2500 to the high ratio insurance company on the "possession date". If you should happen to mess up your payments, the lending institution that has your mortgage would attempt to collect from you, but if unsuccessful, would simply ask the insurance company in question to pay them out. Then the insurance company would come after you to pay or proceed with legal action to gain the right to sell the property from under you. Less than 1% of all mortgages end up this way!
The high ratio insurance company will also charge an application fee through your lender. The fee is $75.00 plus an accredited appraisal of the property (costing $190.00 in the city), or your lender may ask the insuring company to do their own appraisal/inspection at a cost to you of $235.00 If your application is denied by the insurer, a refund is usually available. You don't have to worry about which company to pick, your lending officer takes care of all that stuff.