Posted on July 01, 2015

How to Fund a Down Payment without Saving:

Though scrimping and saving for years may be the conventional way to fund a down payment, there are other options potential home buyers could consider. Though they can be more risky financially, sometimes unconventional funding like borrowing from an RRSP, a gifted down payment or a cash-back mortgage may be right for you. Here’s what you need to know:

Borrowing from other credit sources
When purchasing a home, buyers generally need to put at least five per cent down. The federal government prohibits you from borrowing that five per cent from your mortgage lender if that lender is a bank or federal trust company. However, you’re free to borrow your down payment from a line of credit, personal loan or even a credit card. Not all lenders allow this and the ones who do check that you can afford the extra debt payment. One obvious problem with borrowing your down payment is the higher interest cost.

Getting a cash-back mortgage
In many provinces, lenders offer cash-back mortgages. The money is not technically supposed to be used as a down payment, but can be used for closing costs, which include legal and inspection fees, the land transfer tax and to pay other bills and expenses. In some cases, this may free up other money for you to put down on the home.

Using a gifted down payment
Home buyers with generous relatives may be lucky enough to get a down payment as a gift. Most lenders will consider a gifted down payment if the donor is a parent, grandparent or sibling. A small number of borrowers fraudulently claim their down payments as “gifts,” even though they fully intend to repay the money. That raises the risk level for lenders because the borrower’s debt obligations increase. Of course, both the borrower and giftor must attest in writing to gifted funds being non-repayable, but that is hard to police after closing.

RRSP Home Buyers Plan (HBP)
First-time buyers can borrow up to $25,000 from their RRSP as a down payment. This kind of loan means you’re borrowing from your own retirement savings, as opposed to a third party. You don’t have to start repaying the loan until the second year after the year you make your withdrawal. Even though Revenue Canada wants the funds paid back in 15 annual installments, lenders don’t include those repayments in a borrower’s debt calculations. As a result, some people get approved for a mortgage only to find themselves caught in an annual cash crunch because they didn’t budget for their HBP payment.

Special lender and government programs
Various provinces and municipalities provide down payment assistance grants. These programs are typically for people of low income. Despite these borrowers being higher risk, in some cases, they’re permitted to buy a home with nothing down.

Based on a story in the Globe and Mail.