A down payment is a general requirement to secure a mortgage in Canada. 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 types of options exist.
Key Points
- You may be able to borrow money for your down payment, though you’ll have to pass loan criteria to be eligible.
- Down payment borrowing options include personal loans, lines of credit, and home equity loans, among others.
- Government programs are also available to help you make a down payment for a home purchase.
Can You Get A Loan 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.
Generally speaking, you can’t borrow money for a down payment from your mortgage lender if they’re federally-regulated. In this case, you’ll need to take out a loan for a down payment from an alternative or private lender, who typically allows borrowed down payment funds albeit at a higher interest rate.
Further, it’s also important to understand the rules about borrowing for a down payment for insured mortgages. Depending on the mortgage insurer, you may or may not be allowed to borrow.
CMHC Insured Mortgage Rules On Borrowing Money For A Down Payment
The Canada Mortgage and Housing Corporation (CMHC) does not allow borrowed down payment funds for insured mortgages. That means you can’t take out a loan to cover your down payment if you want to put less than 20% down on your mortgage.
Sagen Rules On Borrowing Money For A Down Payment
Sagen is one of two of Canada’s private mortgage insurers. Unlike CMHC, Sagen allows qualifying buyers to borrow money for a down payment from sources such as:
- Personal loans
- Lines of credit
- Credit cards
- Gifts from people they’re not related to
Sagen requires that the repayment of the money must be included in the Total Debt Service (TDS) ratio calculation.
Canada Guaranty Rules On Borrowing Money For A Down Payment
Canada’s other private mortgage insurer, Canada Guaranty, also allows borrowed funds for down payments on insured mortgages through its Flex 95 Advantage program. Ike Sagen, you can use the following sources for your down payment:
- Personal loans
- Lines of credit
- Lender credit
- Gifts or grants
Your loan payments must also be included in your TDS calculation.
Minimum Down Payment Required In Canada
| 5% | For homes that are $500,000 or less |
| 5% – 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 (*Effective December 15, 2024, the home price cap for insured mortgages will increase to $1.5 million). |
How To Borrow Money For A Down Payment
There are numerous sources you can access to borrow money for a down payment in Canada, including the following:
Can You Use An Unsecured Line Of Credit As A Down Payment?
A line of credit is a unique revolving 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.
Home buyers 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, such an option should be exercised with caution in order to reduce any risk associated with overleveraging. That’s because taking out a loan to get access to funds for a down payment means you’ll be adding more debt to the books, which will increase your debt-to-income ratio and potentially negatively impact your ability to secure a mortgage.
Can You Use a Personal Loan As 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. Keep in mind that interest rates may also be higher, unless you’re able to secure it with collateral.
Can You Use Your Home Equity As A Down Payment?
If you already own a home, you can leverage the equity in your home to purchase and use as a down payment for another property. This may be an option to consider if you found a great home and need to act fast, but haven’t yet sold your existing home.
You can tap into your home equity in the following ways:
Home Equity Line Of Credit (HELOC)
A HELOC is a revolving line of credit that allows you to access your equity up to a specific credit limit. Similar to a credit card, you can draw as much or as little as you want on an as-needed basis, as long as you don’t exceed your credit limit. You’ll only need to pay interest on the amount withdrawn.
Home Equity Loan
Similar to a HELOC, a home equity loan lets you access your home equity to be used for a variety of purposes, including towards your down payment. However, rather than having access to a revolving credit line, you’ll be given a lump sum of money that you’ll need to repay through regular installment payments over a set term. Again, a home equity loan and HELOC may be options if your home has not yet sold.
Can You Use A Credit Card For A Down Payment?
It’s unlikely that your mortgage lender will accept your credit card as a down payment for a home. Most lenders generally require 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, roughly 59% of Canadians have a credit card limit of less than $10,000, whereas a 5% down payment on a $650,000 house is $32,500.
Finally, using a cash advance on your credit card isn’t the best way to come up with a down payment given that most charge double-digit interest rates (20% or more in some cases) on outstanding balances.
See How Much You Qualify For
Be Cautious Of Your Debt-To-Income (DTI) Ratio When Borrowing For A Down Payment
If you are considering borrowing money for a down payment, be aware that this will add to your debt. More specifically, your debt-to-income (DTI) ratio will be affected. This ratio measures your monthly income relative to your monthly debt.
A higher DTI ratio can make mortgage approval difficult. Lenders look at your DTI ratio when assessing your mortgage application. Generally speaking, this ratio shouldn’t be higher than 44% to ensure you can get approved for a mortgage. If it’s any higher than this, you risk being turned down for a home loan as you’re considered to be over-leveraged, and this prone to financial stress.
This is something of particular importance if you borrow a huge amount to make a big down payment. For instance, you may want to borrow enough to cover at least 20% of the purchase price to avoid mortgage default insurance. But if your lender sees that you have a big personal loan for a down payment, that could be a deterrent in your ability to get approved for a mortgage.
You May Need To Come Up With The Minimum Amount Yourself
Further, some lenders may only allow you to borrow money for a down payment if you’re already able to meet the minimum down payment requirements. For example, your lender may only agree to loan you money to take you from a 5% down payment to a 20% down payment only after you’ve managed to save up 5% on your own.
Find The Best Mortgage For Your Needs
| Amount | Rate | Availability | Products | |
 Loans Canada | Varies | Varies | All of Canada | - First mortgage - Refinancing - Renewal - Lender switch - Home equity loans |
 Alpine Credits | $10,000+ | Based on equity | All of Canada except Quebec | - Home equity loans |
 Mortgage Maestro | $10,000+ | 5.19%+ | All of Canada except Quebec | - First mortgage - Refinancing - Renewal - Line of credit (HELOC) - Reverse mortgage |
 Neo Mortage™ | Varies | 5.54%+ | All of Canada except Quebec | - First mortgage - Refinancing - Renewal |
 nesto | $100,000+ | 5.34%+ | All of Canada | - First mortgage - Refinancing - Renewal |
 Homewise | Varies | Varies | BC, AB, MB ON | - First mortgage - Refinancing - Renewal - Lender switch |
 Fairstone | $5,000 $60,000* | 19.99% to 25.99% | All of Canada | - Home equity loans |
Advantages Of Borrowing Money For A Down Payment
Borrowing money for a down payment comes with a few perks, including the following:
- Smaller Mortgage Loan Required – Putting more money towards the purchase price reduces the risk for your lender. This can help you qualify for a lower interest rate and a more flexible payment plan, making your mortgage more affordable and manageable. Plus, your mortgage payments will be smaller, making it easier to fit into your budget.
- No Need to Save – If you can borrow your down payment, you won’t have to struggle to save tens of thousands of dollars. This allows you to enter the housing market sooner instead of waiting until you have the funds for a down payment.
- 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.
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. 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 Debt Service Ratio – Your total debt service ratio is the percentage of income required to pay your housing costs and other monthly liabilities. If this ratio is high when applying for a mortgage, you may not qualify for a favourable loan because you’re considered a riskier client. Plus, you’ll be diminishing your finances, leaving you with less money every month.
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 down payment, 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 to add value and equity, and potentially sell it for a higher price later on.
Save For Longer
Consider putting off your home purchase until you’ve saved enough for a down payment. Just be sure to weigh the risks of waiting too long, as home prices tend to increase over time.
Bridge Loan
A bridge loan is another way to use your home equity to help you purchase a new home. However, unlike a home equity loan or HELOC, a bridge loan requires that your current home be sold firm. A bridge loan provides essential cash flow to finance the purchase of a new home when the sale of your current home hasn’t closed yet. This type of loan is especially useful if the closing dates of the two transactions don’t align.
Government Programs To Help You Make A Down Payment On A House
There may be some programs offered by the government that can help offset the cost of your down payment without having to borrow money. Here are a couple to consider:
RRSP Home Buyers Plan
The federal government offers down payment assistance through the Home Buyers’ Plan. This program allows Canadians to borrow as much as $60,000 from their RRSPs to be put toward a down payment. If you’re buying a home with your spouse or common-law partner, you can withdraw up to $120,000 from your RRSPs.
The great thing about this plan is that you have 15 years to repay your RRSP funds before being taxed on it. If you repay all the money borrowed before the 15 years are 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 or permanent resident
- Designate the property as your principal home no longer than one year after buying it
First Home Savings Account (FHSA)
The Canadian government also offers the FHSA designed to help young Canadians under 40 buy their first home. This account is tax-free, which means you’ll avoid taxation on interest earned from the deposit. It’s also tax-deductible, which means your contributions can reduce your taxable income, saving you money in income taxes.
If eligible, you can use this program to save up to $40,000 toward the down payment on a home purchase, with an $8,000 per year contribution limit.
Final Thoughts
Ideally, you should take some time to save up for a sizable down payment on a home without borrowing funds. Understandably, however, it can be a real struggle to save the money needed for a decent down payment amount. When all else fails, there are ways to borrow the funds for a down payment. 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.
