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Clearing the down-payment hurdle

With Canadian mortgage rates drifting to all-time lows and real estate prices on the upswing, renters are struggling as never before to accumulate down payment money to get into the housing market. Fortunately, in recent years it's become much easier.

"Lenders are getting much more flexible in their approaches," says Ginette Gagnon, a mortgage broker with Multi-Prêts Hypothèques in Montreal. "New products are coming out all the time."

According to Gagnon, in Canada, a traditional mortgage as defined by the big banks is one in which the buyer puts down 25 per cent of the property's value in cash. That's a big chunk of change for young families to come up with, but the benefits are enormous.

Shopping around for a mortgage can pay off

With a little shopping, traditional mortgage customers get access to the big banks' posted interest rates less about one percentage point and sometimes more. For example, Multi-Prêts currently offers customers a five-year rate of 5.1 per cent compared to big banks' posted rates of 6.5 per cent. That works out to be thousands of dollars of savings over the life of a mortgage.

CMHC loans to lower a down payment

One way to cut the minimum down payment required is to get a Canada Mortgage and Housing Corporation (CMHC) insured mortgage, which can reduce the amount you have to put down when you buy a house from 25 per cent of the purchase price to as low as 5 per cent.

CMHC-insured mortgages operate similar to traditional mortgages except the CMHC insures the additional loan amount (the difference between the traditional 25 per cent down payment and the actual down payment). The cost of this insurance is a one-time payment varying between 1 per cent and 3.25 per cent of the total loan, depending on the size of the down payment.

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Non-standard mortgages an option for some

According to Gagnon, another option, which can reduce your minimum down payment to zero is to opt for a non-standard mortgage offered by aggressive financial industry players such as Toronto's Xceed Mortgage Corporation.

Non-standard mortgages are perfect for people with large earning power but few capital resources, such as a student who has just finished his doctorate, or an entrepreneur whose assets are mostly invested in her business.

Non-standard lenders will finance the entire purchase price of your house as long as your total monthly financial commitments (debt, interest, taxes and so on), are no higher than 40 per cent (and in some cases as high as 50 per cent) of your monthly income.

Although non-standard loans offer a lot on the plus side, you'll pay for those advantages. According to Gagnon, the interest rate on a five-year non-standard loan mortgage brokered by Multi-Prêts will run you 7.4 per cent a year.

Using your RRSP savings toward your down payment

One big must for all potential home buyers is to max out their Registered Retirement Savings Plans, says one financial expert.

"Normally, money taken out of your RRSP is included in your taxable income at the end of the year," says Heather Evans, a tax partner at Deloitte Touche in Toronto. "But you can also use RRSP money to help purchase your first home."

Evans is referring to a Canadian income tax provision known as the Home Buyers Plan. Under the plan, buyers can withdraw a maximum of $20,000 from their RRSP and apply it toward their first home. If the home is purchased with a spouse, each person can withdraw $20,000, for a total of $40,000. And the good news is the entire amount can be used as a down payment.

Certain conditions apply, though. For example, the person must be a Canadian resident and must intend to occupy the house as a principal residence. The home must be built or occupied before October 1st of the year following the withdrawal. And the amount must be generally repaid to the RRSP over 15 years beginning the year after the withdrawal.

Experts say renters should save a minimum of 10 per cent of their income, putting as much as possible into their RRSPs, and, if possible, set aside their tax refund to help provide extra cash for incidental moving expenses such as notary fees and renovations.

Whatever the method used to come up with the down payment, experts continue to urge Canadians to stop paying rent.

"There are so many advantages to homeownership," says Evans. "It offers stability, diversification and an opportunity to put aside money for your retirement."

"It's like a forced savings plan," she says. "We find that people who are tenants do not have as many financial resources available when they stop working. But homeowners always have the option of selling their home and living off the proceeds."

Peter Diekmeyer is an independent business journalist based in Canada. He is the Montreal Gazette's management columnist and writes regularly for numerous Canadian trade publications.

-- Posted: Dec. 31, 2003
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