Five Traditional Sources of Down Payment
Mortgage rules in Canada require that buyers put down a minimum down payment of 5% of the sales
price of a home, so once you’ve made the decision to purchase it’s time to decide how you will obtain the
Luckily, there are many ways to acquire the money needed for a down payment. The most common
sources of funds for a down payment are classified as traditional. These sources are favoured from the
perspective of the lender because they are easily verifiable and offer solid proof that the borrower is
capable of servicing the mortgage.
Banks and mortgage lenders are accountable to mortgage default insurers, regulatory bodies, and must
abide by strict rules laid out by government legislation, so they must guarantee all funds are legally
sourced, and prove that they’ve taken the necessary steps to ensure they are lending to qualified
Because lenders need to be cautious of who they lend money to, you will need to provide proper
documentation for each source you use to finance your down payment – so think twice about using that
money you’ve been stashing away under your mattress!
The following are traditional sources deemed acceptable by lenders:
- Savings account – Both non-registered and registered savings accounts (such as a Tax- Free
Savings Account) qualify. All accounts are verified by lenders examining the transaction history,
typically over a period of 90 days.
- Gift from an immediate family member – The lender will need to see a signed letter stating the
sum of money received is, in fact, a gift and not a loan. Also, they will need to see proof that it has
been deposited into your bank account.
- Sale of a personal asset – If you are planning on selling personal property, take care to carefully
document everything. This includes the bill of sale, payment method, and proof you have
deposited the proceeds of the sale into your bank account.
- Inheritance – The lender will verify the source of funds by examining the legal documents
associated with the inheritance and ensuring the funds have been deposited into your bank
- Registered Retirement Savings Plan (RRSP) – You can withdraw up to $25,000 from your RRSP
to help fund your mortgage, under the Home Buyers’ Plan. This is projected to be increased to
$35,000 after the 2019 Federal Budget was released. This program essentially works as a tax-
free, interest-free loan, where the funds must be repaid over 15 years. Another condition is the
funds must be in the RRSP account for a minimum of 90 days prior to being used for the purpose
of funding the down payment.
Sources that don’t fall under the traditional category include borrowed funds from a line of credit, credit
card, loans from family members or friends, and lender cash-back incentives. Typically, these sources
are only permitted by lenders if you have an excellent credit rating and a stellar repayment history.
While there is a wide range of options available when it comes to securing the money needed for your
down payment, the key is to ensure you have the necessary documentation to present to your lender, so
they can verify it’s legitimacy. Whether the money will be coming from your savings account or that
unexpected lottery win, always remember to keep a paper trail.