No Down Payment Mortgages
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The dreaded down payment often keeps young Canadians from being able to afford their first home for years and with the price of houses rising in many of the major cities, even 5% of the purchases 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, it’s completely understandable that you’ll definitely want to consider is as an option. But the problem is that a no down payment mortgage, while it might seem like a great idea in theory, technically it’s not a great idea for the average person looking to purchase a home. Here’s everything you need to know about the no down payment mortgage, this way you’ll be able to make the best choice for you and your finances.
Should you get a mortgage with no down payment?
A no down payment mortgage sounds like a great idea, especially if you’re currently giving away a large chuck of your income to rent an apartment while trying to save so you can purchase your first home. But before you’re seduced by the idea you need to decide whether or not this financing option is the best strategy for you at this point in your life. There are a few conditions that should be met before you should 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 all of these conditions describe your current financial situation then a no down payment mortgage is in fact a good idea and you could potentially seriously benefit from it, just remember that while you might think you can handle it a lender still needs to decide whether or not they agree.
Unfortunately if none of the above conditions describes you and your current financial situation then a no down payment mortgage is definitely not a good idea for you right now, we suggest you continue to save while rethinking your current spending and saving strategies.
Where should I get my down payment from?
Purchasing a home with no down payment saved doesn’t mean that you don’t have to make a down payment; it simply means that you’re not using your own hard earned and saved cash to pay for the down payment. It means you’re going to borrow your down payment (at least 5% in Canada), which in return means you’re taking on even more debt. This is why it’s important that you’re in good financial standing before you take on even more debt than is technically necessary.
Here’s the thing, 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. So if you’re planning on not saving up for a down payment and want to borrow it instead, you’ll need to find an alternate lender. There are a few different ways you can get a down payment without having to save for it:
- Line of credit. But not from the same bank you’re getting your mortgage from.
- Personal Loan. This could potentially be a good option for someone who is in great financial standing but doesn’t want to wait any longer to purchase a house.
- 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.
- Borrowing from a family member. If you have a generous family member then you could potentially borrow your down payment from them.
- Government programs. Depending on what province you live in there are special government programs that can provide lower income families with down payment assistance.
There are obviously a few major issues with borrowing your down payment and these absolutely need to be carefully considered before you make any final decisions. If you borrow your down payment you’re taking on even more debt, this could potentially be extremely financially draining for years. Also the interest rates associated with borrowing your down payment can be very high, sometimes higher than the interest rate associated with your actual mortgage.
The Bottom line
If you’re currently trying to save up for a down payment on a home and are having trouble with how long it’s taking then now is the time to look into the possibility of purchasing a house with no down payment. Deciding early on is a great idea as it will allow you to take your time and make all the necessary plans and take all the appropriate steps.
Just remember that purchasing a house without any cash on hand is a serious decision and that qualifying for a mortgage and another loan to cover your down payment doesn’t mean that it’s the best option for you, take your time and consider all scenarios before you take the plunge.
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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.