Unfortunately, not all of us were born as multibillionaires and people like us need to solve a lot of problems. Buying a house is already a very huge expense because the mortgage is not free. But you also need to give a down payment to show that you can afford to buy a house. Will you use a line of credit for down payment? Or can you find another way? We will talk about it in this article.
Canadians Debt Statistics
Before starting the article, let’s take a peek at the official statistics on debts. Debts can be:
- Something that gains value over time
- Credit cards
- Personal debts
- Something that loses value over time
Housing takes the biggest part of the statistics, 35% of the monthly budget and over 1000$ each month go there. In general, Canadians borrow more than 10 billion dollars each year. The numbers can be even more surprising if we are talking about credit cards (actually it is one of the ways for paying down payments). Canadians debt here is more than 93$ billion! But another good option exists – line of credit for down payment, it will be much more profitable, but we will talk about it later.
Ways For Borrowing Down Payment Money
Now we will take a closer look at ways where we can find down payment money. You can consider:
- Personal Loan
- Line of Credit
We will now consider them in greater detail one by one.
The main types of personal loans are:
- Sticker, for example $1500 to $20,000. Usually, your down payment will be smaller than the loan amount so you can borrow money for your down payment. But when you pay the whole amount the interest rate will start to grow and usually, around 5% per year is normal, so you need to pay a lot of interest during the first years.
In some provinces, there is a fixed interest rate from 1-5% per year so if you can use this one, it would be a better choice but it is very rare since most people have a low income and they need a higher credit score.
- Adjustable Rate, for example 5%, 20%, 12%. It is the best choice for several reasons:
- You can pay a small principal sum for many years (up to 10 years) and the interest is very small (below 1%) but later it will rise. It is very cheap because you can pay a comparatively more amount for 10 years, while the future interest is low enough that you won’t mind paying it. This type of loan can be very useful if you plan on buying a house in another city where the price growth rate will be lower than in your city, for example, if you plan to buy a house outside Toronto which has a better growth rate than inside of it.
- You can get a very low rate on your personal loan. You don’t need a high credit score to get this type of loan. This is very useful if you have bad credit and you can’t get a regular mortgage.
The main problems of this type of loan are:
- They have a quick interest rate adjustment so if you have a problem with it, it will be difficult to pay down the principal sum quickly before the interest rate rises again;
- The principal sum you have to pay is very small so you will be charged by the interest rate. The interest rate is usually lower than your regular interest rate for a mortgage so if you are paying monthly it will be much higher than the monthly mortgage amount.
A personal loan is the best option if you can pay monthly installments and they are available at a reasonable rate.
RRSP’s (Registered Retirement Savings Plans)
RRSPs are very useful for those who can afford to save a lot of money. When you start saving money, you will be able to build up a big sum of money that you can then borrow from it later on. You can also reduce your taxes by getting an RRSP deduction.
The downsides of using RRSPs are the following:
- They have very high taxes so if you have low income;
- Borrowing money from RRSPs will mean that you won’t be able to use your future savings.
You can use the following ways to borrow money from your RRSP:
- Home Equity Line of Credit or Home Equity Loan (HELOC). You can borrow from this option up to 75% of the value of your home, but it is very expensive and you need a very high down payment. Even if you don’t pay your loan regularly, the interest rate will keep on growing which is normally higher than a mortgage interest rate;
- Debt Consolidation. This is a good option for those with good credit history and more than 75% equity in their home. You can get a lower rate of interest this way, but you can pay an extra amount in taxes;
- Consolidate your debts. If you have a lot of debts you will be able to get a lower interest rate this way, although it will also increase your taxes.
Some mortgage brokers in Canada allow you to borrow free from your RRSP. Usually, they have a special agreement with banks so it is easier for them to do this kind of loan. But most of them have higher interest rates, so they can still make a lot of money by charging a high interest rate. You’d better choose the one with a low rate if you want to use this method for paying down payment on your house.
Line of Credit
Line of Credit is different from the other methods mentioned in this article. And you can use a line of credit for down payment. With this type of loan, it is better to use them for paying your bills so you don’t need to pay high interest rates in terms of keeping your payments in one time or monthly installments. You can use this method when you have a limited amount of money available.
With Line of Credit, you can borrow an unlimited amount for a short period of time (1–24 months). Then, when you get paid, you can pay off your credit card debts with that amount. You can also borrow from it for making payment on the house that you are buying if that house is in progress like under construction or renovation. You can then pay off your mortgage with that money as well.
If you want to use the line of credit for down payment, you will need to make sure that you can pay back the loan in full right now. With this method, there is no way to fix your interest rate or make monthly installments. It is important to know how much you can afford before applying for this type of loan because it is very easy to get carried away with this kind of loan.
If you are not careful with it, it will be very difficult for you to get your hands on the principal sum quickly enough before interest rates increase which will make it more expensive for paying off.
Line Of Credit For Down Payment: Conclusion
You can use several ways to borrow money for paying down payments. The easiest one is to borrow from your own RRSP’s, but that is not the best way to do it because of high taxes. If you want to use that for a down payment, you should set a few months aside first and then borrow from it.
One of the most recommended methods is borrowing free money from your RRSP without paying taxes first or using a line of credit scenario because it will be very easy for you to pay off the principal sum quickly with this kind of loan. It will also help you build up your credit score at the same time!