June 13, 2024

What to Do If You Can’t Make Your Down Payment For A Mortgage In Canada

What to Do If You Can’t Make Your Down Payment For A Mortgage In Canada

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Saving for a down payment is often one of the biggest hurdles for prospective homeowners in Canada. With rising property prices and the high cost of living, many find it challenging to accumulate the necessary funds. This article will explore what to do if you’re struggling to make your down payment, offering practical solutions and introducing innovative options like Ourboro’s shared equity model.

Understanding the Down Payment Requirement

In Canada, a down payment is a crucial part of buying a home. It represents the initial amount you pay upfront when purchasing a property, and it significantly impacts your mortgage terms and monthly payments.

Minimum Down Payment Percentages

  • Homes priced up to $500,000: Minimum 5% down payment.
  • Homes priced between $500,000 and $999,999: 5% on the first $500,000 and 10% on the portion above $500,000.
  • Homes priced at $1 million or more: Minimum 20% down payment.

Failing to meet these requirements can delay your homeownership dreams and may result in higher mortgage insurance premiums.

Why Down Payments Matter

A substantial down payment not only reduces the amount you need to borrow but also lowers your monthly mortgage payments. Additionally, a higher down payment can result in better mortgage rates and terms, as it reduces the lender’s risk. Moreover, putting more money down upfront can save you thousands of dollars in interest over the life of your mortgage.

Common Reasons for Struggling with Down Payments

Several factors can make it difficult to save for a down payment:

  1. High Cost of Living: Everyday expenses in major Canadian cities can consume a significant portion of your income.
  2. Rising Home Prices: The real estate market in cities like Toronto and Vancouver continues to see price increases, making it harder to save enough.
  3. Insufficient Savings: Many people struggle to save due to existing financial obligations such as student loans or credit card debt.
  4. Unexpected Expenses: Emergencies and unforeseen costs can deplete your savings, setting you back in your down payment goals.

Immediate Steps to Take

If you’re finding it difficult to save for a down payment, consider these immediate actions:

  1. Assess Your Financial Situation: Take a close look at your income, expenses, and existing savings to understand your financial health.
  2. Review Your Budget: Identify areas where you can cut unnecessary expenses. This could include dining out less, canceling unused subscriptions, or finding more affordable alternatives.
  3. Explore Government Assistance Programs: Canada offers several programs to help first-time homebuyers.

Government Assistance Programs in Canada

First-Time Home Buyer Incentive

The First-Time Home Buyer Incentive is a shared equity mortgage program by the Canadian government. It allows eligible first-time homebuyers to finance a portion of their home purchase through a shared equity mortgage with the government, reducing monthly mortgage payments.

Home Buyers’ Plan (HBP)

The Home Buyers’ Plan allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to put towards their down payment. The withdrawn amount must be repaid within 15 years.

Provincial and Municipal Programs

Various provinces and municipalities offer additional assistance programs. For example, Ontario’s Land Transfer Tax Refund for First-Time Homebuyers provides a refund of up to $4,000.

Additional Resources

  • Canada Mortgage and Housing Corporation (CMHC): CMHC offers various tools and calculators to help you understand your mortgage options and plan your down payment.
  • Financial Consumer Agency of Canada (FCAC): The FCAC provides educational resources and tips on saving for a down payment and managing your finances.

Alternative Financing Options

If government programs aren’t enough, consider these alternative financing options:

Borrowing from Family or Friends

A loan or gift from family or friends can help you reach your down payment goal. Ensure that any agreements are clearly documented to avoid misunderstandings.

Personal Loans

Personal loans can provide additional funds for your down payment. However, be mindful of interest rates and repayment terms.

Lines of Credit

A line of credit offers flexible borrowing options. You can withdraw funds as needed and pay interest only on the amount borrowed.

Employer Assistance Programs

Some employers offer assistance programs for homebuyers. Check with your HR department to see if your company provides any benefits or loans to help employees with down payments.

Shared Equity Mortgages

Definition and Concept

A shared equity mortgage allows you to co-own a property with an investor, reducing the financial burden of buying a home. The investor contributes to the down payment and shares in the future appreciation or depreciation of the property.

Benefits of Shared Equity Mortgages

  • Lower Initial Costs: Reduced down payment requirements make it easier to enter the housing market.
  • Shared Risks: Both parties share in the financial risks and rewards.
  • Access to Better Properties: Potential to afford higher-value homes.

Introduction to Ourboro as a Solution

Ourboro offers a unique shared ownership model that helps potential homeowners achieve their dreams without taking on additional debt. They invest in the future value of your home, sharing in the appreciation or depreciation.

How Ourboro Can Help

Overview of Ourboro’s Shared Ownership Model

Ourboro’s model involves co-investing in your home by contributing to the down payment. This contribution is not a loan, so there are no interest payments or additional debt.

Step-by-Step Process to Get Started with Ourboro

  1. Lock In a Contribution: Complete an application and work with Ourboro’s team to determine how much they can contribute towards your down payment.
  2. Co-Buy Your Home: Get connected with a licensed mortgage broker and a top real estate agent to find your new home.
  3. Grow Together: Ourboro supports you throughout your homeownership journey, sharing in any gains or losses when you sell the property.

Real-Life Success Stories

Case Study: Ricardo & Patricia Ricardo and Patricia co-bought a home valued at $900,000. They contributed $45,000 (5%) and Ourboro contributed $135,000 (15%), making a total down payment of $180,000 (20%). After five years, the home appreciated to $1,200,000.

PartyContributionPercentage of Down PaymentEquity Stake in Home
Ricardo & Patricia$45,00025%25%
Ourboro$135,00075%75%

Upon selling, after paying off the mortgage, the remaining proceeds were $600,000. Ricardo and Patricia received $150,000 (25%), and Ourboro received $450,000 (75%).

Long-Term Strategies

While immediate solutions can help you achieve your down payment goals, long-term strategies are essential for financial stability and future homeownership.

Consistent Saving Habits

Develop a habit of saving regularly. Set up automatic transfers to your savings account to ensure consistent contributions.

Investment Options to Grow Your Savings

Consider investing in low-risk options like GICs or mutual funds to grow your savings over time.

Financial Planning and Advice

Consult with a financial advisor to create a comprehensive plan tailored to your goals. They can provide valuable insights and strategies to help you save effectively.

Building Your Credit Score

A good credit score can improve your mortgage terms and lower your interest rates. Pay your bills on time, keep your credit card balances low, and avoid taking on new debt to build a strong credit history.

Leveraging Tax Benefits

Take advantage of tax benefits available to homebuyers. For instance, the First-Time Home Buyers’ Tax Credit (HBTC) offers a non-refundable tax credit for qualifying homebuyers, which can provide some financial relief.

Monitoring the Real Estate Market

Stay informed about the real estate market trends in your desired area. Understanding market conditions can help you make informed decisions about when to buy and what type of property to invest in.

Conclusion

Saving for a down payment is a significant challenge for many prospective homeowners in Canada. However, with the right strategies and resources, it’s possible to overcome this hurdle. From government assistance programs to innovative solutions like Ourboro’s shared equity model, there are various options available to help you achieve your homeownership dreams.

By exploring all available options and adopting consistent saving habits, you can make your down payment and take the first step towards owning your home. Remember, achieving homeownership is a journey, and with the right support, you can reach your destination.

Note: This article is intended for informational purposes only and does not constitute financial advice. Please consult a financial advisor or mortgage professional before making decisions about your mortgage.