The Age-Old Question - How to Achieve a Down Payment

Homeownership continues to be a goal held by many. The pride of working to own your home and creating memories with loved ones is highly valued. Over the last year, home prices have gone through the roof and house sales have hit new sales records, causing many to be knocked out of the market due to bidding wars. The bidding wars are not only within the main cities but across the province.

There are government incentives to assist Ontario borrowers to make their goal of homeownership a reality (https://www.cmhc-schl.gc.ca/en/consumers/home-buying/first-time-home-buyer-incentive).

With mortgage rates at historically low levels and the thought of a property appreciating in value considerably over a “shorter” period (months vs. years) is serving as an increased impetus for some Ontarians to reach homeownership as soon as is financially possible.

The choice to borrow to achieve a healthy downpayment needs to be considered carefully against saving.

The Pro’s and Con’s of Borrowing For a Downpayment - What are the Options?

If low borrowing costs are making you lean towards borrowing to come up with a decent downpayment to buy a property there are several “borrowing” options:

• Borrow against the equity in another property,

• Borrow from family and friends,

• Borrow from a retirement fund,

• Private short term loan,

• Personal loan,

• Line of credit,

• Credit cards

Are there advantages to borrowing funds for a downpayment? - The Pro’s

• The funds will enable homeownership sooner - with such a robust real estate market in Ontario and low mortgage rates that can be locked in on mortgages, time is of the essence.

• Save on mortgage default insurance (through CMHC or Sagen or Canada Guaranty) - if you have enough to cover 20% of the purchase price of your home, you save on mortgage insurance premiums and tax on the premiums.

• Build wealth by investing in property - real estate always appreciates and this gives a homeowner the ability to build up equity and increase their overall wealth.

• The cost of borrowing is at historically low levels - low mortgage rates may be just enough to make this decision an easy one.

What Are The Cons?

• Using equity as a way to borrow can pose a risk -if you are thinking of tapping into home equity to buy another property, there is a risk that it will take more time to build up the equity in your property if appreciation levels cool off slightly.

• Taking out a loan to cover down payment will increase your total debt service ratio (TDS) - with every new loan, your credit score may be affected slightly and the new debt is added to your mortgage purchase application therefore causing your TDS to increase.

• You will have to pay back this debt despite low interest rates - nothing is for free. The new debt must be repaid.

• There are costs when taking out a loan - every loan/debt comes with the cost of borrowing; ensure that you have the necessary funds to cover them without overextending yourself.

How About Other Options for Building a Downpayment?

• Government programs are available to help - The First Time HomeBuyers Program launched in 2019 by the Federal Government provides the opportunity for first-time homebuyers to have their savings matched. The program is sometimes referred to as a Shared Equity Program. You will be sharing equity with the Government in direct relation to the money that was initially put in - www.CMHC.ca

• Take advantage of RRSP increased contribution room - In 2019, the amount of money that first-time homebuyers could take out of their RRSP without tax penalty towards a down payment increased from $25,000 to $35,000. For a couple who are both first-time home buyers, the combined amount is $70,000.

• Saving the old-fashioned way - Before credit cards, there were very few alternatives to purchasing anything, big or small. If the cash was not available then there had to be a way to save the money to pay for it. The same principle can apply to saving for a downpayment. Saving the old-fashioned way by cutting variable expenses, reducing unnecessary spending, and setting up a separate fund that a portion of your paycheck will be automatically transferred to monthly can lead to a healthy downpayment saving.

• Buy a less expensive property - Now this is a great idea! Stay within your means!

Bottom line - do not overextend yourself financially. Owning a home is supposed to be enjoyable. The only way to enjoy your home purchase is if you have financial peace of mind and know that you can cover all costs - both routine and unexpected ones. If borrowing is still within your financial comfort zone then it could be advisable. If using other methods to come up with a needed down payment is more within your financial comfort zone then take the time to save without having to borrow. Happy House Hunting

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