What to Know About Down Payments
What To Know About Down Payments
As a potential buyer looking for a new home, you’ll need to know how much you can afford to put down as a down payment. The amount of a down payment varies greatly depending on the type of property you’re buying, the size of the mortgage and other factors. Determining what you can afford will help you evaluate if you’re financially prepared for the purchase of a new home.
What is a Down Payment?
A down payment is a lump sum that a buyer pays up front when purchasing a home. The down payment represents a portion of the home’s total purchase price. Most often buyers will take out a mortgage from a bank or other financial institution to finance the remainder of the home purchase price. The higher the down payment is, the less the buyer will need to borrow to finance the rest, resulting in lower monthly payments and less interest paid. A deposit is separate from a down payment, as a deposit is a certified cheque or bank draft with the Offer of Purchase and will be deducted from your required down payment amount.
Saving Up For a Down Payment
Saving for a down payment can take time and be challenging for many potential buyers. Going over your budgets, income and expenses, and estimated price for a new home can help you determine if you’re financially prepared. Stick to your savings goals and over time try to put aside funds for a potential down payment.
Gifted Down Payments
A gifted down payment is a sum of money offered to finance the down payment, usually given by a family member. This is often done to ensure that the buyer has enough to cover the full cost and even avoid extra premiums. Most often done for first-time buyers, this is a flexible way to help you buy a new home. All that is needed is a signed Gift Letter and documentation that the gifted funds have actually been transferred. The Gift Letter should include the donor’s name and contact information, the donor’s relationship to the recipient, the dollar amount of the gift, a statement of no repayment, the donor’s signature, the date and the address of the property being purchased. A gifted down payment is not considered a loan, as the Gift Letter will show the amount does not have to be repaid.
Programs & Incentives
The Government of Canada also offers some programs and incentives to help first-time buyers. The Home Buyers Plan lets first-time buyers borrow from their Registered Retirement Savings Plan for their home purchase. The First Time Home Buyer Incentive is an interest-free, shared-equity mortgage that must be repaid when the home is sold or after 25 years, whichever comes first.
If you have any questions about the real estate market, please contact The Miller Real Estate Team.