Why Downpayment Source Matters

Lisa Manwaring • Mar 20, 2024

If you’re looking to purchase a property, although you might not think it matters too much, the source of your downpayment means a great deal to the lender. Let’s discuss the lender requirements, what your downpayment tells the lender about your financial situation, a how downpayment helps establish the mortgage loan to value.

Anti-money laundering

Lenders care about your downpayment source because, legally, they have to. To prevent money laundering, lenders have to document the source of the downpayment on every home purchase.

Acceptable forms of downpayment are money from your resources, borrowed funds through an insured program called the FlexDown, or money you receive as a gift from an immediate family member.

To prove the funds are from your resources and not laundered money from the proceeds of crime, you’ll be required to provide bank statements showing the money has been in your account for at least 90 days or that you’ve accumulated the funds through payroll deposits or other acceptable means.

Now, if you’re borrowing all or part of your downpayment, you’ll need to include the costs of carrying the payments on the borrowed downpayment in your debt service ratios. If you’re the recipient of a gift from a direct family member, you’ll need to provide a signed gift letter indicating that the funds are a true gift and have no schedule for repayment. From there, you’ll need to show the money deposit into your account.

Financial suitability

Lenders care about the source of the downpayment because it is an indicator that you are financially able to purchase the property.

Showing the lender that your downpayment is coming from your resources is the best. This demonstrates that you have positive cash flow and that you’re able to save money and manage your finances in a way that indicates you’ll most likely make your mortgage payments on time. If your downpayment is borrowed or from a gift, there’s a chance that they’ll want to scrutinize the rest of your application more closely.

The bigger your downpayment, the better, well, as far as the lender is concerned. The way they see it, there is a direct correlation between how much money you have as equity to the likelihood you will or won’t default on their mortgage. Essentially, the more equity you have, the less likely you will walk away from the mortgage, which lessens their risk.

Downpayment establishes the loan to value (LTV)

Thirdly, your downpayment establishes the loan to value ratio. The loan to value ratio or LTV is the percentage of the property’s value compared to the mortgage amount. In Canada, a lender cannot lend more than 95% of a property’s value. So, if you’re buying a home for $400k, the lender can lend $380k, and you’re responsible for coming up with 5%, $ 20k in this situation.

But you might be asking yourself, how does the source of the downpayment impact LTV? Great question, and to answer this, we have to look at how to establish property value. Simply put, something is worth what someone is willing to pay for it and what someone is willing to sell it for. Of course, within reason, having no external factors coming into play. When dealing with real estate, an appraisal of the property will include comparisons of what other people have agreed to pay for similar properties in the past.

You’ll often hear of situations where buyers and sellers try to inflate the sale price to help finalize the transaction artificially. Any scenario where the buyer isn’t coming up with all of the money for the downpayment, independent of the seller, impacts the LTV.

All details of a real estate transaction purchase and sale have to be disclosed to the lender. If there’s any money transferring behind the scenes, this impacts the LTV, and the lender won’t proceed with financing. Non-disclosure to the lender is mortgage fraud.

So there you have it; hopefully, this provides context to why lenders ask for documents to prove the source of your downpayment. If you’d like to talk about mortgage financing, please connect anytime; it would be a pleasure to work with you.

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Protect Yourself at Renewal

By Lisa Manwaring • 24 Apr, 2024

It’s a commonly held belief that if you’ve made your mortgage payments on time throughout the entirety of your mortgage term, that the lender is somehow obligated to renew your mortgage. The truth is, a lender is never under any obligation to renew your mortgage. When you sign a mortgage contract, the lender draws it up for a defined time, so when that term comes to an end, the lender has every right to call the loan. Now, granted, most lenders are happy to renew your mortgage, but several factors could come into play to prevent this from happening, including the following: You’ve missed mortgage payments over the term. The lender becomes aware that you’ve recently claimed bankruptcy. The lender becomes aware that you’re going through a separation or divorce. The lender becomes aware that you lost your job. Someone on the initial mortgage contract has passed away. The lender no longer likes the economic climate and/or geographic location of your property. The lender is no longer licensed to lend money in Canada. Again, while most lenders are happy to renew your mortgage at the end of the term, you need to understand that they are not under any obligation to do so. So how do you protect yourself? Well, the first plan of action is to get out in front of things. At least 120 days before your mortgage term expires, you should be speaking with an independent mortgage professional to discuss all of your options. By giving yourself this lead time and seeking professional advice, you put yourself in the best position to proactively look at all your options and decide what’s best for you. When assessing your options at the time of renewal, even if the lender offers you a mortgage renewal, staying with your current lender is just one of the options you have. Just because your current lender was the best option when you got your mortgage doesn’t mean they are still the best option this time around. The goal is to assess all your options and choose the one that lowers your overall cost of borrowing. It’s never a good idea to sign a mortgage renewal without looking at all your options. Also, dealing with an independent mortgage professional instead of directly with the lender ensures you have someone working for you, on your team, instead of seeking guidance from someone with the lender’s best interest in mind. So if you have a mortgage that’s up for renewal, whether you’re being offered a renewal or not, the best plan of action is to protect yourself by working with an independent mortgage professional. Please connect anytime; it would be a pleasure to work with you!

Understanding the Recent Housing Affordability Measures in Canada

By Lisa Manwaring • 18 Apr, 2024

In recent years, housing affordability has become a significant concern for many Canadians, particularly for first-time homebuyers facing soaring prices and strict mortgage qualification criteria. To address these challenges, the Canadian government has introduced several housing affordability measures. In this blog post, we'll examine these measures and their potential implications for homebuyers. Increased Home Buyer's Plan (HBP) Withdrawal Limit Effective April 16, the Home Buyer's Plan (HBP) withdrawal limit will be raised from $35,000 to $60,000. The HBP allows first-time homebuyers to withdraw funds from their Registered Retirement Savings Plan (RRSP) to use towards a down payment on a home. By increasing the withdrawal limit, the government aims to provide young Canadians with more flexibility in saving for their down payments, recognizing the growing challenges of entering the housing market. Extended Repayment Period for HBP Withdrawals In addition to increasing the withdrawal limit, the government has extended the repayment period for HBP withdrawals. Individuals who made withdrawals between January 1, 2022, and December 31, 2025, will now have five years instead of two to begin repayment. This extension provides borrowers with more time to manage their finances and repay the withdrawn amounts, alleviating some of the immediate financial pressures associated with using RRSP funds for a down payment. 30-Year Mortgage Amortizations for Newly Built Homes Starting August 1, 2024, first-time homebuyers purchasing newly built homes will be eligible for 30-year mortgage amortizations. This change extends the maximum mortgage repayment period from 25 years to 30 years, resulting in lower monthly mortgage payments. By offering longer amortization periods, the government aims to increase affordability and assist homebuyers in managing their housing expenses more effectively. Changes to the Canadian Mortgage Charter The government has also introduced changes to the Canadian Mortgage Charter to provide relief to homeowners facing financial challenges. These changes include early mortgage renewal notifications and permanent amortization relief for eligible homeowners. By implementing these measures, the government seeks to support homeowners in maintaining affordable mortgage payments and mitigating the risk of default during times of financial hardship. The recent housing affordability measures announced by the Canadian government are aimed at addressing the challenges faced by homebuyers in today's market. These measures include increasing withdrawal limits, extending repayment periods, and offering longer mortgage amortizations. The goal is to make homeownership more accessible and affordable for Canadians across the country. As these measures come into effect, it's crucial for homebuyers to stay informed about the changes and their implications. Consulting with a mortgage professional can help individuals explore their options and make informed decisions about their housing finances. If you're interested in learning more about these changes and how they may affect you, please don't hesitate to connect with us. We're here to walk you through the process and help you consider all your options and find the one that makes the most sense for you.