Can You Get A No Down Payment Mortgage In Canada?

Saving for a down payment can take years, especially if you want to provide more than the minimum down payment requirement. Moreover, with the price of houses rising in many of the major cities, even 5% of the purchase price is typically a larger number than most people are comfortable with. So when you hear about the possibility of a no down payment mortgage in Canada, it’s completely understandable that you’ll want to consider it as an option.

Here’s everything you need to know about no down payment mortgages in Canada to make the best choice for you and your finances.

Key Points

• With a no down payment mortgage, no money is required at closing; instead, both your mortgage and down payment will be funded by a lender. 
• If you’re taking out a mortgage with a federally-regulated lender, you’ll need to borrow your down payment funds from an alternative lender.
• CMHC-insured mortgages cannot use borrowed funds for the down payment, so you’ll need to either come up with at least a 20% down payment to avoid CMHC insurance or work strictly with an alternative lender for your mortgage.

Can I Get A No Down Payment Mortgage In Canada? 

Technically, there’s no such thing as a no down payment mortgage. You still have to come up with the money; it simply means you’re not using your own hard-earned and saved cash to cover the down payment. 

Instead, you’re borrowing your down payment, which means you’re taking on even more debt. This is why it’s important that you’re in good financial standing before you consider this option.

How Does A No Down Payment Mortgage Work?

A no down payment mortgage in Canada works the same as a regular mortgage, except no money is required at closing. The only cash you’ll need is to cover the standard closing costs. 

Your mortgage and down payment will both be funded by a lender. However, the government doesn’t allow Canadians to borrow their down payment from their mortgage lender if their lender is a bank or federal trust company. As such, you’ll have to find an alternative lender for your down payment. 

Once you find an alternative lender and get the financing you need for a down payment, you simply make payments to your alternative lender, like you would to the bank for your mortgage. 

CMHC Insured Mortgages: No Down Payment Restrictions

Before July 1, 2020, non-traditional down payment sources or borrowed funds, were allowed for mortgages with a down payment of less than 10%, as long as borrowers had a good credit score. But now, the CMHC does not allow down payment funds coming from sources that will increase your debt. That includes loans and other sources that require you to increase your debt load.

What About Sagen And Canada Guaranty?

While CMHC may no longer permit it, Sagen and Canada Guaranty still allow qualified buyers to borrow their down payment.

Sagen Option

Sagen allows eligible borrowers to use various monetary sources to contribute to their down payment, such as:

• Personal loans
• Lines of credit
• Credit cards
• Monetary gifts from anyone not related to the borrower, either through familial or legal ties

Do note that the repayment of funds must be included in the Total Debt Service (TDS) ratio calculation.

Canada Guaranty

Canada Guaranty’s Flex 95 Advantage program allows borrowers with strong credit to access 5% equity from various sources that are at arm’s length to the purchase, such as the following:

• Personal loans
• Lines of credit
• Lender credit
• Gifts or grants 

Like Sagen’s program, Canada Guaranty requires that loan payments be included in the TDS calculation.

Can You Get A No-Down Payment Mortgage With An Alternative Lender? 

Private mortgages are not federally insured by corporations like the CMHC and have fewer regulations compared to traditional mortgages. For this reason, you may have more flexibility when using borrowed funds for down payments. 

However, dealing with alternative lenders and private mortgages comes with more risk for the lender when a high-ratio mortgage is not insured. That’s why these lenders will typically charge higher interest rates to offset this risk.

Types Of Loans You Can Use As A Down Payment

There are a few different ways you can get a down payment without having to save for it:

Line Of Credit

You can opt for a line of credit for your down payment. Credit lines allow you to access revolving credit on an as-needed basis and repay what you withdrew on a flexible schedule. But if you choose this route, the line of credit cannot be from the same bank you’re getting your mortgage from.

Personal Loan

This could be a good option for someone in great financial standing but who doesn’t want to wait any longer to purchase a house. You can take out a lump sum of money through a personal loan, use the money for a down payment, and then repay your loan over installments, much like you would with mortgage payments.

Credit Card

This is probably the worst option, as charging at least 5% of the purchase price of your home could put you into credit card debt for years. Plus, credit card rates are typically very high and average around 20%. So, you could be paying more in the long run in interest if you use your credit card to access funds for a down payment. 

Borrowing From A Family Member

If you have a generous family member,  you could borrow your down payment from them. You’ll need to provide your lender with a gift letter to prove the funds were not borrowed. 

Other Ways To Get Money For A Down Payment

Both the federal and provincial governments provide programs that can provide lower-income families with down payment assistance.

Pros And Cons Of Borrowing For A Down Payment

Borrowing for a down payment has its advantages. However, just the same, it can come with several challenges as well. 

Pros

• No more renting – when you have to pay for a down payment, it can take a few years of saving before you have enough to buy a house. With borrowing, you can immediately start investing and grow equity in your home. Rather than wasting money on rent, each payment you make goes toward owning your home. 
• Avoid mortgage default insurance – When you make a down payment of less than 20%, you must purchase mortgage default insurance (CMHC insurance) which can cost thousands of dollars. By borrowing the full 20%, you won’t have to add mortgage default insurance to your home loan.
• Grow your wealth – A house is usually considered one of the largest assets a person owns. The earlier you buy it, the more equity you can build, which helps grow your net worth. 

Cons

• Falling house prices – When you place a down payment of 20%, it typically protects you from owing more than what your house is worth, in the event house prices fall. But pouring more money into a home upfront with borrowed funds could risk your investment if home prices tumble.  
• Lower equity – You could borrow money through a home equity loan or HELOC to cover your down payment funds. But borrowing this way means you would be reducing your home equity. 
• Increased debt – If you borrow your down payment, you’re taking on even more debt. This could potentially increase your monthly payments, which can be financially draining for years. Moreover, it can affect your debt-to-service ratio, which in turn can affect the amount you want to borrow for a mortgage. 
• Higher interest – The interest rates associated with borrowing your down payment can be very high, most are higher than the interest rate associated with your actual mortgage.

How Do You Improve Your Chances Of Being Approved For A No Down Payment Mortgage? 

Getting approved for a no down payment mortgage can be a challenge. However, there are a few factors you can work on to improve your chances of being approved. 

Credit Score

While each lender has its own set of criteria, generally, lenders will want you to have a good credit score. This means you’ll need a credit score of at least 650. In addition, you’ll want to have no prior late or missed payments on any of your credit products within the last year or two. 

Employment 

There are three things a lender looks at when evaluating your employment: 

• Income – How much money you make in comparison to how much you want to borrow.
• Stability – How long have you had your job and how stable it is. 
• Loss in income – If you were to have a drop in income, would you still be able to make your payments? 

Closing Fees

Closing costs are still required to be paid in cash. Typically, it can cost 1 to 2% of your home purchase price (not including the down payment). Thus, you’ll need to have that much cash available by closing day. Usually, closing costs are about 2% to 5% of the purchase price. 

Other Income Sources 

Your lender may accept other forms of income besides employment income, such as the following:

• Pension benefits
• Rental income or other investment income
• Spousal or child support payments

Should You Get A Mortgage With No Down Payment?

A no down payment mortgage in Canada sounds like a great idea, especially if you’re renting an apartment while trying to save for your first home. 

There are a few conditions that should be met before you consider a no down payment home loan:

• A stable income
• Above-average credit
• Being able to afford both a monthly mortgage payment and other life expenses
• Being able to financially handle a decrease or loss of income

If these conditions describe your current financial situation, a no down payment mortgage may be a good idea. In some cases, you could potentially benefit from it. Just remember that while you might think you can handle a no down payment mortgage, a lender still needs to agree.

Unfortunately, if none of the above conditions describes you and your financial situation, then a no down payment mortgage is probably not a good idea for you. Instead, we suggest you continue to save while rethinking your current spending and saving strategies.

Additional Reading

Why Do Smaller Down Payments Qualify For Lower Mortgage Rates?

Mortgage Prepayment Penalty: How Much Will It Cost You?

Down Payment Assistance Programs In Canada

The Bottom Line

If you’re trying to save up for a down payment on a home but find it’s taking too long, now may be the time to look into a no down payment mortgage. Deciding early on is a great idea, as it will allow you to take your time, make all the necessary plans, and take all the appropriate steps.

Just remember that purchasing a house without cash on hand is a serious decision. Be sure to take your time and consider all scenarios before you take the plunge.

No Down Payment Mortgage FAQs

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.