How To Borrow Money For A Down Payment

A down payment is a general requirement to secure a mortgage in Canada, with the minimum being 5% of the home price. Unfortunately, coming up with the funds for a sizable down payment can be difficult, especially when you have other bills and debts to pay.

If saving up for this kind of money proves to be a challenge for would-be homebuyers, perhaps borrowing the funds may be an option. Find out if you can borrow money for a down payment and what type of options exist.

Can You Borrow Money For A Down Payment?

Many lenders will let you borrow money for a down payment, as long as you pass their minimum requirements. A down payment can be a significant amount, so you’ll usually need a good income, credit score, and payment history to qualify for a decent loan.

You must show the lender that you have the financial aptitude to pay back your borrowed funds on time. In Canada, the minimum down payment is… 

• 5% for homes that are $500,000 or less
• 10% for homes that cost between $500,000 and $999,999
  • 5% of the first $500,000 
  • 10% for the portion of the purchase price above $500,000
• 20% for homes that are 1 million or more

How To Borrow Money For A Down Payment?

There are numerous sources to borrow money for a down payment in Canada. Here are a few down payment borrowing sources for Canadians to consider looking into.

Use A Line Of Credit For A Down Payment

A line of credit is a unique loan product that works somewhat like a credit card in which you withdraw funds on credit – up to your assigned limit – and pay interest only on the portion used. Once that money is paid back, you can borrow that money, again and again, paying only interest on the amount withdrawn.

Homebuyers may borrow against their line of credit in order to get the money needed to come up with a decent-sized down payment for their mortgage. However, it cannot be from the same financial institution that the mortgage is being obtained. Moreover,  such an option should be exercised with caution in order to reduce any risk associated with overleveraging.

Use A Personal Loan For A Down Payment

A personal loan may be an option as a source of down payment funds, but usually only if your credit score and financial history are healthy. That’s because a lender will want to ensure that you are financially capable of handling additional debt, especially if you’re planning to take out a mortgage for a home purchase.

If you are considering taking out a personal loan to borrow for a down payment, be aware that this will add to your debt and affect your debt-to-income ratio, which can make it tougher to get approved for a home loan.

Can You Use A Credit Card For A Down Payment?

It is unlikely that your mortgage lender will accept your credit card as a down payment for a home. Most lenders do not accept credit cards as payment and generally require your down payment funds to be in your bank account for 60 to 90 days. Moreover, credit cards generally don’t have a high enough credit limit for a down payment. For example, 59% of Canadians have a credit card limit of less than $10,000, whereas a 5% down payment on a $600,000 house (approximate average home price in Canada) is $30,000. 

Can You Use Your RRSP As A Down Payment?

The federal government offers down payment assistance in the form of the Home Buyers’ Plan. This program allows Canadians to borrow as much as $35,000 from their RRSPs to be put toward a down payment on the purchase of a home.

The great thing about this plan is that you have 15 years to repay your RRSP funds before being taxed on it. If you pay back all the money borrowed before this 15-year period is up, the funds are non-taxable.

Who Is Eligible For The Home Buyer’s Plan?

There are eligibility requirements for the Home Buyers’ Plan. You must:

• Be a first-time homebuyer
• Sign a purchase agreement on a qualifying home
• Be a Canadian resident
• Designate the property as your principal home no longer than one year after buying it

Advantages Of Borrowing Money For A Down Payment 

Borrowing money for a down payment comes with many positive aspects, including:

• Smaller Payments – Because you’re buying more of the property and reducing risk for your lender, making a down payment can help you qualify for a lower interest rate, smaller mortgage payments and a more flexible payment plan. 

• No Need to Save – Additionally, you won’t have to struggle to save up tens of thousands of dollars right off the bat. Your mortgage is expensive enough already, without adding your down payment to it.    

• No Need to Buy Mortgage Default Insurance – If you borrow enough money for a down payment of 20% or more, you won’t have to purchase mortgage default insurance from the CMHC (Canada Mortgage and Housing Corporation).   

Disadvantages Of Borrowing Money For A Down Payment

Borrowing money for a down payment has some downsides too, such as:

• More Debt – Borrowing money isn’t free and the cost of a loan, combined with your mortgage and other expenses can get expensive, fast. Some lenders also charge high-interest rates and fees, especially if your finances aren’t great.    

• Can Affect Your TDS Ratio – Your total debt service ratio is the percentage of income required to pay your housing costs and other monthly liabilities. If your ratio is high when applying for a mortgage, you may not qualify for a favourable loan because you’re considered a riskier client.        

Alternatives To Borrowing Money For A Down Payment

Not ready to borrow money for a down payment? Check out these alternatives: 

Gifted Down Payment

If you’re lucky, a loved one may give you money for a down payment as a gift. However, before you can use that money as a downpayment, you’ll usually have to provide the lender with a gift letter that outlines the following:

• The amount and purpose of the gifted money
• Your relationship with the gift giver
• The giver’s personal information
• The date you received the funds 
• The address of the home you’re financing 
• Proof that the gift is recognized by all parties involved   

Buy A Less Expensive House

Rather than borrowing money for a down payment, consider purchasing a less expensive home. While it’s tough to find these days, buying a smaller or older home might be more affordable. This way, you can fix the property up over the years and potentially sell it for a higher price later on.  

Save For Longer

Instead of borrowing money for a down payment, consider putting off your home purchase till you’ve saved enough for a down payment. Your home should have everything you want, including a fair price. Plus, a higher down payment can lead to lower mortgage payments and help you avoid becoming house poor. 

Additional Reading

Why Do Smaller Down Payments Qualify For Lower Mortgage Rates?

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Your Guide To Mortgage Down Payments In Canada

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No Down Payment Mortgages

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Final Thoughts

Ideally, you should have taken the time to save up for a down payment on a home without having to borrow funds. That said, it can be a real struggle to come up with the amount of money needed for a decent down payment amount. When all else fails, there are ways to borrow the funds needed to come up with a down payment for a home purchase. Just be sure to speak with a financial advisor or mortgage specialist before choosing which route to take to make your dreams of buying a home a reality.