How to Buy a Home with No Down Payment in Canada

Are you dreaming of owning a home in Canada but need help saving up for a down payment? You’re not alone. The good news is that purchasing a house without a down payment is possible. This guide will explore options for no-down-payment home loans and strategies to help you achieve your homeownership goals.

Understanding Mortgage Down Payments in Canada

Before discussing buying a home with no down payment, let’s look at how regular down payments work. This will help you see why no down payment options are popular.

What is a Down Payment?

A down payment is the money you pay upfront when buying a house. It’s part of the home’s price. Your mortgage covers the rest.

How Much Do You Need for a Down Payment?

The amount you need depends on the price of the home:

For homes $500,000 or less: You need at least 5% down.
For homes between $500,000 and $999,999: You need 5% on the first $500,000 and 10% on the rest.
For homes $1 million or more: You need at least 20% down.

An Example of a Down Payment

Let’s use an example. In February 2024, the average home price in Canada was $685,809. Here’s what you’d need to put down:

5% on $500,000 = $25,000
10% on $185,809 = $18,580.90
Total down payment: $43,580.90

That’s a lot of money for many people to save up.

What is Mortgage Loan Insurance?

You need mortgage loan insurance if your down payment is less than 20%. This protects the lender if you can’t make your payments. You don’t buy this directly. Your lender gets it from CMHC, Sagen, or Canada Guaranty. The cost is usually between 0.60% and 4% of your mortgage. You can pay it all at once or add it to your mortgage payments.

As of July 1, 2020, the Canada Mortgage and Housing Corporation (CMHC) has implemented new guidelines regarding down payment sources for mortgages with a down payment of less than 10%. Non-traditional down payment sources or borrowed funds are no longer permitted if they increase the borrower’s debt load. This includes loans and other sources that require an increase in debt.

Unlike CHMC, Sagen and Canada Guaranty still allow qualified buyers to borrow their down payment. Qualified buyers can use personal loans, lines of credit, credit cards and monetary gifts from familial or legal ties to contribute to their downpayment.

What if You Have a 20% Down Payment?

You don’t need mortgage insurance if you can pay 20% or more as a down payment. This can save you money. For a $685,809 home, a 20% down payment would be $137,162.

What Else Matters for Getting a Mortgage?

Lenders look at more than just your down payment. They also check:

Your credit history
Your credit score
How much debt do you have
How much money you make each year

Now you know how typical down payments work. This helps explain why some people look for no down payment options. It can be hard to save up for a big down payment.

Understanding No Down Payment Mortgages

Traditionally, buying a house requires a substantial down payment, typically 5-20% of the home’s value. However, no down payment mortgage loans in Canada offer an alternative path to homeownership for those who haven’t saved up a large sum.

Can You Buy a Home with No Down Payment?

Yes, you can buy a home with no down payment in Canada, but it’s essential to understand the pros and cons of this approach. While the term “no down payment mortgage” is often used, it is important to understand that you still need to come up with the money for the down payment. The difference is that you are not using your own hard-earned and saved cash to cover the down payment. It allows you to become a homeowner sooner, however, it often comes with higher interest rates and additional costs.

Options for No Down Payment Home Loans in Canada

Let’s explore some ways you can purchase a home without a down payment in Canada:

1. The Borrowed Down Payment Program

As per government regulations, Canadians are not permitted to borrow their down payment from their mortgage lender if the lender is a bank or federal trust company. Therefore, you will need to seek an alternative lender for your down payment. Once you have secured an alternative lender and obtained the necessary financing for a down payment, you will make payments to your alternative lender in the same manner as you would make payments to a bank for your mortgage. However, dealing with alternative lenders comes with increased risk for the lender when a high-ratio mortgage is not insured. To offset this risk, these lenders typically charge higher interest rates.

How it works:

You take out a loan for the down payment (usually 5% of the home’s value)
This loan is combined with a mortgage for the remaining 95%
You end up with a 100% financed home purchase

Considerations:

Higher overall debt
Potentially higher interest rates
Need to qualify for both the down payment loan and the mortgage

2. Vendor Take Back Mortgages

In some cases, the seller of a property can offer financing to the buyer, which is referred to as a Vendor Take back Mortgage. This can be beneficial if the seller is keen to close the deal quickly or if traditional financing options are unavailable. The seller loans the buyer the money for the down payment, a portion of the mortgage, or even all of it. This type of agreement can be beneficial for both the buyer and the seller.

In a vendor take-back mortgage, the seller retains ownership of a portion of the property’s equity, equal to the amount of the loan. This dual ownership arrangement continues until the buyer pays off the principal of the loan, plus interest. The second lien is in place to guarantee the repayment of the loan. If the buyer defaults on the loan and fails to fulfill their contractual obligations, the seller has the subordinte claim on the property.

How it works:

The seller typically finances a percentage of your mortgage amount along with a traditional mortgage
The seller continues to own a percentage of the property’s equity value

Considerations:

Usually, it comes with a higher interest rate
The VTB mortgage terms can be negotiated with the seller

3. Using Your RRSP for Down Payment (First-Time Home Buyers’ Plan)

While not strictly a no-down-payment option, the Home Buyers’ Plan (HBP) allows first-time homebuyers to withdraw up to $35,000 from their RRSP for a down payment.

How it works:

You can take out up to $35,000 from your RRSP.
You don’t pay tax on this money when you take it out.
You use this money for your down payment.
You have a 15-year period to repay the withdrawn funds to your Registered Retirement Savings Plan (RRSP).

Considerations:

You must be a first-time homebuyer
The withdrawn amount must remain in your RRSP for a minimum of 90 days before removal.
You’ll miss out on potential investment growth in your RRSP

4. Government Programs

Some government programs can help you purchase a home with a minimal down payment:

First-Time Home Buyer Incentive: The government contributes 5-10% of the home’s purchase price, effectively reducing your mortgage payments.
Affordable Housing Programs: Some provinces and municipalities offer programs to help low-income individuals buy homes with minimal down payments.

Steps to Purchase a Home Without a Down Payment

If you’re wondering how to purchase a home without a down payment, follow these steps:

Check Your Credit Score: A good credit score is crucial for qualifying for no down payment home loans.
Get Pre-Approved: Speak with lenders to determine how much you can borrow and what options are available.
Research Programs: Look into government programs and lender-specific options for no-down payment mortgages.
Calculate Total Costs: Remember, a house loan without a down payment often has higher overall costs. Factor in mortgage insurance, higher interest rates, and other fees.
Consider Future Affordability: Ensure you can manage the mortgage payments and other homeownership costs.
Work with a Mortgage Broker: They can help you navigate various options and find the best solution.

Pros and Cons of Buying a Home Without a Down Payment

Pros:

Become a homeowner sooner
Start building equity earlier
Potential for property value appreciation

Cons:

Higher monthly payments
More interest paid over the life of the loan
Risk of owing more than the home’s value if property prices decline
Mortgage insurance requirements

Is a No Down Payment Mortgage Right for You?

While buying a home without a down payment in Canada is possible, there are better choices for everyone. Consider your financial situation, long-term goals, and ability to manage higher monthly payments.

Remember, just because you can buy a home with no down payment doesn’t always mean you should. Saving for a down payment, even a small one, can provide more favourable loan terms and lower overall costs.

Conclusion

Buying a house without a down payment in Canada is possible through various programs and strategies. Whether it’s through borrowed down payments, vendor take back mortgages, or government initiatives, options are available for those struggling to save a large down payment.

However, it’s crucial to carefully consider the long-term implications of a no-down payment house loan. While it can help you achieve homeownership sooner, it often comes with higher costs and risks.

Before deciding to pursue a no-down payment mortgage, consult with financial advisors and mortgage professionals and thoroughly research your options. With careful planning and consideration, you can make an informed decision about the best path to homeownership for your unique situation.

Remember, the journey to owning a home is a significant financial decision. Whether you choose a traditional mortgage or opt for a no-down payment solution, ensure it aligns with your long-term financial goals and stability.

Frequently Asked Questions

What are the main types of no-down-payment home loans available in Canada?

The main types of no-down-payment home loans in Canada include:

Borrowed down payment programs
Vendor take back mortgages
First-Time Home Buyer Incentive
Affordable housing programs (varies by province and municipality)

Each option has its own requirements and considerations, so it’s essential to research thoroughly and consult with a mortgage professional.

How does a no-down-payment mortgage loan differ from a traditional mortgage?

A no-down-payment mortgage loan allows you to finance 100% of your home purchase, while a traditional mortgage typically requires a down payment of 5-20%. No down payment mortgages often have higher interest rates, additional fees, and mandatory mortgage insurance. They may also have stricter qualifying criteria due to the increased risk for the lender.

Are there any government programs that help with no down payment home purchases in Canada?

Yes, the Canadian government offers programs that can assist with low or no-down payment home purchases:

The First-Time Home Buyer Incentive provides 5-10% of the home’s purchase price to reduce mortgage payments.
The Home Buyers’ Plan allows first-time buyers to withdraw up to $35,000 from their RRSP for a down payment.
Some provinces and municipalities offer affordable housing programs that may include down payment assistance.

Can you buy a house with zero down payment if you have bad credit?

While it’s more challenging, buying a house with zero down payment may still be possible if you have bad credit. However, you’ll likely face higher interest rates and stricter lending criteria. Improving your credit score before applying for a mortgage is advisable. Some alternative lenders may offer options for those with lower credit scores, but these often come with less favourable terms.

What are the risks of getting a house loan with no down payment?

The main risks of a house loan with no down payment include:

Higher monthly payments due to a larger loan amount and potentially higher interest rates
Paying more interest over the life of the loan
Risk of owing more than the home’s value if property prices decline (negative equity)
Less flexibility if you need to sell or refinance in the short term
Mandatory mortgage insurance, adding to your overall costs

How can I improve my chances of qualifying for a no-down-payment mortgage in Canada?

To improve your chances of qualifying for a no down payment mortgage:

Maintain a good credit score (usually 680 or higher)
Have a stable, verifiable income
Keep your debt-to-income ratio low
Save for closing costs and emergency funds
Consider using a mortgage broker who specializes in no down payment options
Research and understand various programs available

Are there alternatives to buying a home without a down payment?

Yes, alternatives to buying a home without a down payment include:

Saving for a small down payment (even 5% can make a difference)
Seeking help from family (gifted down payments are allowed by many lenders)
Exploring rent-to-own options
Looking into shared equity mortgages
Considering cheaper properties or locations to reduce the required down payment

How does mortgage insurance work with no down payment home loans?

When you buy a home without a down payment, you must purchase mortgage default insurance, often called CMHC insurance. This protects the lender in case you default on your payments. The insurance premium is typically added to your mortgage amount, increasing your overall loan and monthly payments.

Can you purchase any type of property with a no down payment mortgage?

Most no down payment mortgage options are designed for primary residences only. Investment properties or second homes usually require a traditional down payment. Additionally, there may be restrictions on the type and value of properties eligible for no down payment programs. Always check the specific requirements of the program or lender you’re considering.

What should I consider before deciding to buy a house without a down payment?

Before opting for a no down payment house loan, consider:

Your long-term financial goals and stability
The total cost of homeownership, including mortgage payments, property taxes, maintenance, and utilities
Your ability to handle potentially higher monthly payments
The current real estate market conditions and potential for property value changes
Your plans for the property (how long you intend to live there)
The opportunity cost of not saving for a down payment