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#mortgagetip Down Payment

February 09, 2017 | Posted by Nathan Zacharias | Tagged in


#mortgagetip Down Payment

A Down Payment in its simplest form would be the difference between the Purchase price and the mortgage. For Example: If you had a purchase price of $300,000 and a mortgage of $200,000 then subtracting the two numbers reveals a down payment of $100,000. This figure is important for a number of reasons, but to the lender this is considered the Equity in the security for the loan (Remember a mortgage is simply a loan secured by real estate) and for most lenders one of the most important elements of the application.


Why is equity so important?

There are a lot of simple explanations for the importance of Equity

  • More equity provides greater certainty that there will be enough money left after legal fees and expenses if the lender were forced into enforcing its rights under the Law of Property Act should the borrower default on the loan
  • A borrower investing a large amount of money as a down payment will be less likely to neglect their debt obligations than a borrower investing a smaller amount of money as a down payment as they have more to loose
  • Someone with a down payment from their own resources versus using borrowed money should within reason be more likely to fulfill their end of the bargain on the loan
  • Money that is borrowed usually comes with a cost and, as such, when a down payment is borrowed the lender will want to know the terms of the loan so the monthly debt obligation on the loan can be factored into the mortgage. A down payment that is borrowed is sometimes referred to as Secondary Financing
  • Because the Federal Government set new rules for High Ratio Mortgages the size of the down payment is actually governed by Canadian Legislation and any mortgages arranged through lenders governed by the Bank Act that have a down payment of less than 20% are required to be insured whereby the borrower must obtain Mortgage Default Insurance
  • If a borrower is purchasing with a Gifted Down Payment then it needs to be verified that the money is actually being gifted because a gift will not result in any monthly debt obligations to pay the money back
  • In the event a third party has an interest in the mortgage by participating in the down payment a lender will want to know what the status of that relationship or benefit to that third party is
  • As lenders must ensure that your down payment is not a part of any Money Laundering Scheme another topic of discussion for down payments is proving where the money has come from and providing a three month history on the funds
  • Lastly, but certainly not least, the larger the down payment the smaller the mortgage amount is. A smaller mortgage will result in a lessor mortgage payment and a smaller down payment will result in a greater mortgage payment so the size of the down payment affects a borrowers Debt Service Ratios and their ability to qualify for the mortgage based on their income versus their debt


Can my down payment be borrowed?

Yes, of course, BUT, it is important you let your broker know that you intend to borrow your down payment for the reasons listed above. You must also know that no all lenders or mortgage insurers will allow a borrowed down payment in their product mix. For this reason it is important to disclose your intentions right away to ensure you do not miss out on the interest rate due to obtaining a rate hold at a lender that does not allow this method of down payment.

Can I use a 2nd mortgage for my down payment?

Using a 2nd mortgage (a loan that is registered on title in second in priority to the 1st mortgage is called a 2nd mortgage) would be a form of secondary financing and you would need to disclose this in advance. This is possible, and it is done every day but there are a few things that remain constant when a 2nd mortgage is utilized as a form of the down payment:

  • The interest rate on the 2nd mortgage is normally underwritten at a much higher interest rate and is in most circumstances offered by a lender that is unrelated to the first mortgage lender
  • Because the interest rate on the 2nd mortgage is significantly higher the resulting payment is also quite high, and as you recall this payment must be factored into the debt service calculations that determine your ability to repay the loan
  • Even though a 2nd mortgage may be allowed a common theme has developed recently that requires the borrower come up with a minimum of 10% of the down payment from their own resources


Proof of down payment

To do their due diligence against money laundering as well as to evaluate the mortgage application a lender will typically ask for proof of down payment which can be provided in a number of different ways depending on the circumstance

Savings – The best way is to obtain 3 months bank statements with a current balance. Most lenders will require that the bank statements have proof of ownership via: Name, address, bank account number

Investments – Three months statements or a quarterly statement of investments will usually suffice. In the event any of your investments are held in a government monitored account I.E. RRSP, the lender may require proof that the investments are able to be utilized, that they are not locked in, and whether or not they are subject to a tax hold back when cashed.

Gifted Down Payment – Most lenders have their own letterhead that specifies the details they need to know, and request a signature from the borrower, and the person giving the down payment as a gift. They normally state that giver is a relative, and that the money does not have to be paid back. Additionally some lenders may require the proof the gifted funds have been deposited into the borrower’s bank account

2nd Mortgage – Normally all the details of the 2nd mortgage loan will need to be provided and verified by the 1st mortgage lender. They are curious to know: amount of the mortgage, term of the mortgage, interest rate, payment, and terms.

RRSP Home Buyers Plan – Three months proof of the investments will need to be provided as well as confirmation that the registered funds are able to be withdrawn tax free. RRSP can be cashed and used for a down payment even if it is not withdrawn as per the RRSP Home Buyers Plan, however, it will be subject to a tax holdback and as such the lender will need to verify there are still enough funds remaining after the holdback.


Nathan Zacharias B.Comm. – Broker Axiom Exzact Mortgage

Phone: 403-668-4260


Nathan Zacharias