The mortgage system in this country has been under strain for some time due
to innovative ways of financing properties. As a result of losses, mortgage
companies and banks have established that a tighter control on proving the down
payment might be the answer. The theory reads that if a Consumer has little or
no real down payment, then what is the incentive for this Consumer to continue
making mortgage payments if and when cashflow gets difficult?
The down payment on a home can be as low as 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 down payment 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 at
least 15 days prior to closing.
c) A loan from your RRSP (if the vehicle that holds 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.
f) The repayment of a debt that someone owed you will be scrutinized as if you
were trying to cheat. Be prepared to offer a copy of the promissory note, a
sworn affidavit that the debt is real, a copy of the debt re-payer's cheque, a
letter from the bank holding the funds that the amount being repaid has been in
the debt payer's bank account for at least 60 days.
Beyond proving your down payment of at least 5%, you must also prove you have
enough money to pay for the closing costs (legal fees, appraisal fees, land
transfer tax, prepaid property taxes, etc.) sitting in your bank account at
least 15 days prior to closing.
With the exception of RTO, the down payment 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 down payment through accumulation of
"in trust" amounts over the rental period.
If your down payment 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
down payment 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 down payment, 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. Your
down payment is crucial to your purchase. If for any reason you feel the source
of your down payment will be challenged, call me to discuss the situation.