Saving for a down payment can take years, especially if you want to provide more than the minimum down payment requirement. Given the cost of housing these days, even a 5% down payment is too much for many homebuyers to handle. But what about no down payment mortgages? Do they exist in Canada?
Key Points
- With a no-down-payment mortgage, you still require money for the minimum down payment, however, instead of using your savings, you’re using borrowed money.
- You may need to use an alternative lender for your down payment, as the government doesn’t permit homebuyers to borrow their down payment from their mortgage provider if they’re a traditional financial institution.
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. Rather than using your own saved cash to cover the down payment, you would simply borrow a certain amount to use as a down payment when you take out a mortgage.
Because of this, you’re essentially taking on even more debt. This is why it’s important that you’re in good financial standing before you consider a no-down-payment mortgage option.
How Does A No-Down-Payment Mortgage Work?
A no-down-payment mortgage in Canada works the same as a regular mortgage, except the money you come up with for a down payment is borrowed. The only cash you’ll need to come up with on your own is for the purpose of paying the standard closing costs.
In other words, 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.
Learn more: How To Borrow Money For A Down Payment
CMHC Insured No Down Payment Mortgage Eligibility
The CMHC has restrictions when it comes to the source of down payment funds. More specifically, down payments must be arm’s length and can’t be tied to the purchase and sale of the home. Funds for down payments may come from non-traditional sources, such as unsecured personal loans or unsecured credit lines.
This option is also only available:
- To borrowers with a strong credit history,
- For 1-2 unit properties with a loan-to-value (LTV) ratio of 90.01% to 95%.
- For homeowner loans
Note: Non-permanent residents and loans under the chattel loan insurance product are not eligible.
Learn more: CMHC
Sagen Insured No Down Payment Mortgage Eligibility
Like CMHC mortgages, Sagen requires the borrowed funds to be at arm’s length from the purchase and sale of the home.
Eligible borrowers can borrow from 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
Keep in mind that the repayment of funds must be included in the Total Debt Service (TDS) ratio calculation.
Canada Guaranty Insured No Down Payment Mortgage Eligibility
Canada Guaranty allows borrowers to use borrowed funds as a down payment through their Flex 95 Advantage program. It 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?
Yes, you can borrow your down payment from an alternative or private lender. Since private mortgages aren’t federally insured by corporations like the CMHC and have fewer regulations compared to traditional loans, you may have more flexibility when using borrowed funds for down payments.
However, alternative lenders take on more risk with uninsured high-ratio mortgages. As such, these types of lenders will typically charge higher interest rates to offset this risk. So, your mortgage can be more expensive overall due to the higher rate you pay.
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
A personal loan 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
Using your credit card to access funds for a down payment may be possible, but it’s also a very expensive option. A high amount of credit card debt can make it very difficult to repay, especially given the very high rates credit card companies charge. 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.
Pros And Cons Of A No Down Payment Mortgage
Borrowing for a down payment has its advantages. However, just the same, it can come with several challenges as well.
Pros
Benefits of a no-down-payment mortgage are as follows:
- Get Into The Housing Market Sooner – 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. But if you borrow your down payment, you don’t have to wait to save up and can immediately start investing and growing equity in your home. Plus, each payment you make goes toward owning your home rather than renting.
- Avoid Mortgage Default Insurance – When you make a down payment of less than 20%, you must purchase mortgage default insurance (also known as 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 will ever own. The earlier you buy a home, the sooner and faster you can build equity, which helps grow your net worth.
Cons
Along with the perks of a no-down-payment mortgage are a couple of downsides to be aware of:
- 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 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 of at least 660, though the exact number may differ among lenders. The higher your credit score, the better your chances of getting approved for a mortgage, especially one that requires no down payment.
Income
The key to getting a no down payment mortgage is to have sufficient income. This is the only way you’ll qualify.
Your earnings should be high enough to cover your loan payments as well as your existing bills. Not only will the lender look at your income, but they will also assess your current debt to make sure you’re not over-leveraging yourself with a new mortgage. In this case, your debt-to-income ratio will also be looked at, which measures your monthly income relative to your debt.
Employment
Job stability is another key factor that lenders look at. More specifically, the amount of time you’ve been working is indicative of your job stability.
Liquid Assets
You’ll need to have some money readily available to buy a home, as closing costs are still required to be paid in cash. Typically, closing costs are about 2% to 5% of the purchase price. This can add up to be thousands of dollars, which you’ll need to have available by closing day.
Other Ways To Get Money For A Down Payment
While borrowing money in the form of a personal loan, credit card, or other type of financing may help you get the funds for a down payment, other options may be available.
Government Down Payment Assistance Programs
Both the federal and provincial governments provide programs that can provide lower-income families with down payment assistance.
Federal Programs
The federal government of Canada offers the RRSP Home Buyers’ Plan (HBP), which allows first-time homebuyers to withdraw up to $60,000 from their RRSP account to purchase their first home without being taxed on the withdrawn funds. The money can be used as a down payment, and must be repaid within 15 years.
Provincial Programs
The following provinces offer financial assistance for those looking to purchase a home:
| Province | Program | More Information |
| Saskatchewan | National Affordable Housing Corporation’s Down Payment Assistance Program (currently on hold) | Click here |
| Nova Scotia | Down Payment Assistance Program (DPAP) | Click here |
| Manitoba | Down Payment Assistance from Manitoba Housing | Click here |
| New Brunswick | Home Ownership Program | Click here |
| Prince Edward Island | Down Payment Assistance Program (DPAP) | Click here |
Learn More: Down Payment Assistance Programs In Canada
Gifted Down Payments
A gifted down payment is money given by a close family member to be put towards the purchase of a home. If you have a family member who is willing to help you out financially, you may be able to use a monetary gift as a down payment on a home purchase.
However, there are rules surrounding gifted down payments. More importantly, the lender will likely want to see a gift letter that specifically states that the money is a gift that does not have to be paid back. This ensures that you’re not taking on additional debt before applying for a mortgage.
They may also insist that the funds come from an immediate family member, such as a parent, sibling, or grandparent, though some lenders may allow monetary gifts from other family members.
Learn more: How Does A Gifted Down Payment In Canada Work?
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 describe 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.
Should You Save For A Mortgage?
If you have enough time and the financial means to do so, saving up for a down payment is highly recommended. There are several advantages of saving up for a sizable down payment before taking out a home loan, including the following:
- Less Money To Borrow: The higher your down payment, the less you’ll have to borrow. Lower loan amounts may be easier to qualify for.
- Lower Monthly Payments: When you reduce your loan amount, you subsequently lower the amount you have to pay each month, which can be easier on your budget.
- No Mortgage Insurance: A down payment over 20% means you can avoid CMHC mortgage insurance, which can save you a little money on your overall mortgage costs.
- More Home Equity: A bigger down payment means you’ll start off with more equity in your home.
Smaller Down Payments May Mean Lower Interest Rates
An interesting thing to note is that a bigger down payment isn’t always best when it comes to the interest rate you pay. In fact, you may be able to secure a lower rate with a smaller down payment. The reason? Mortgage insurance.
When a mortgage is insured, this reduces the lender’s risk. In turn, the lender may be more willing to offer a lower rate. So, making a down payment of less than 20% of the purchase price might mean a bigger loan, but it might also mean a lower rate.
Learn more: Why Do Smaller Down Payments Qualify For Lower Mortgage Rates?
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
Can I finance 100% of a home purchase?
Can I use other alternative income to qualify for a mortgage?
Can you purchase a home with a partial down payment?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
