For some home buyers, particularly those considering buying their first home their biggest challenge is securing a down payment for a home.
With the federal government requiring home buyers to provide a minimum down payment of 5%, and lenders no longer allowed to provide cash-back down payment mortgages, along with the new mortgage qualifying rules this can be especially difficult for those seeking the necessary funds.
The good news is, there are still many options and incentives available to first-time buyers attempting to make their dream of owning a home a reality.
Here are five options for first-time home buyers to help them finance their down payment.
Home Buyers' Plan
The Home Buyers' Plan allows first-time home buyers to withdraw up to $25,000 from their RRSPs to help buy a home. This amount can also be increased to $50,000 for couples.
There are many benefits to this type of loan. First of all, the amount you borrow is not taxable as long as you pay it back within 15 years of withdrawing the funds. Better yet, you're borrowing your own money that you’ve been saving for retirement and investing that into home equity.
There are some things to consider when drawing off your RRSP, however. In withdrawing, you'll lose out on some tax-deferred investment. You may also find yourself strapped for cash if you don’t factor in repayments to your RRSPs in the years ahead.
All In The Family
A growing trend in the home buying market is that of the gifted down payment. Baby boomer parents of financial means are providing the down payment as a gift to their children. If this is an option available to you, both you and the gift giver will need to document that the funds provided are a gift and will not be paid back.
If you do go this route, be sure to invite those parents or relatives over for dinner at your new home often!
Other Credit Sources
Depending on your credit score and ability to borrow, it's possible to borrow funds for a down payment using a credit card, personal loan or line of credit. If a lender will allow this, they'll make sure you can take on the extra debt payment before approving it.
Should you decide to borrow using this method, you'll be paying this amount back at a much higher interest rate than you would using other options. Discuss with your financial advisor whether this is a realistic option for you to pursue.
Tax-Free Savings Account
If you have the time and patience, utilizing a tax-free savings account to save up for your down payment is a viable option.
These accounts can be set up with any financial institution, and depending on the type of investment held in this accounts, do not have a limit to which you can withdraw funds. As implied by its name, funds in these accounts, as well as income generated from the account such as interest and capital gains, are tax-free contributions.
If you're looking to save for your down payment without using one of the options above, you'll have peace of mind knowing all the income from these accounts can be used for your down payment.
Independent Lenders
There are options for home buyers to secure a down payment using a loan from vendors who will lend at a much higher interest level. Alternatively, there are also programs that will provide financial assistance for your down payment.
If you're having trouble saving for the down payment on your first home, there are options available to help you. However, as you explore these options be sure to consult with your financial advisor or banking professional to understand which option is best for you.
