5 alternatives for buying a home with no cash down
Last modified: 2021/05/27 | Approximate reading time 5 mins
In the past, it was possible to get a mortgage loan with no cash down to buy a property. But since 2012, the government has imposed a 5% minimum down payment to access a mortgage and 10% for homes that exceed $500,000. The down payment represents that part of the purchase price that you pay by yourself. The remainder is provided by your lender in the form of a mortgage.
Real estate prices having practically exploded in the last 20 years, becoming a homeowner is now more complicated. Since salaries have not really kept pace, securing a down payment on a property becomes very difficult.
However, you may agree that if you have a stable job and are able to pay your rent and credit card every month, you will certainly be able to get a mortgage to buy a home.
Even if you can't manage to provide the initial down payment, there are alternative ways to secure one. Here is an overview:
How to buy a home with no cash down?
1. Take advantage of municipal programs to finance your down payment
Most large cities like Quebec City, Montreal or Laval offer home ownership programs to help residents become homeowners. These programs take the form of purchase credits, interest-free loans, rebates on property transfer duties or property tax credits.
For instance, the City of Québec offers the Quebec Family Access Program which provides you with a loan equivalent to 5% of the price of the property. This loan, called an "accession credit", allows you to finance your down payment, without interest. However, the program only applies to the purchase of a new home.
Eligibility requirements for the Quebec Family Access Program:
- Not have owned a property in the last 5 years;
- The immovable property must be a new single-family home or a divided co-ownership;
- Have a maximum income of $100,000 for a couple (or $110,000 if there are three or more children) ;
- The loan must be repaid if refinancing, selling or renting the property and at the end of the mortgage repayment.
2. Using your RRSPs for a down payment (HBP Program)
The Home Buyers' Plan (HBP) is a program set up by the federal government. This program allows you to use part of the money accumulated in your Registered Retirement Savings Plan (RRSP) account to buy or build a home. This means you can use up to $35,000* of the funds accumulated in your RRSP ($70,000 for a couple). A way to "lend money to yourself" without any tax consequences.
*Applicable only to withdrawals made after March 19, 2019.
Afterwards, you will be allowed two years to begin making repayments. Payments are annual and can be made over a maximum of 15 years. Of course, you can make early repayments without penalty.
Note that the money borrowed can be used for the down payment as well as for other expenses related to the purchase of your new home, such as notary fees, transfer tax, renovations, furniture, etc.
HBP Eligibility Requirements:
- Have a stable and permanent job;
- Have a good credit history;
- Have a relatively low debt ratio;
- RRSP funds must have been deposited for at least 90 days.
3. Getting a loan or a personal line of credit
A personal loan and a personal line of credit are two options that can help you secure a down payment for your real estate purchase. The difference between the two is that a personal loan requires that you make regular payments according to a specific schedule, while a personal line of credit is more flexible.
Either can be used as a non-traditional down payment for the purchase of a property, provided of course that you have an excellent credit record and that the bank agrees to finance you! It must be said that it is quite difficult to find a lender to help you take out a loan with this type of down payment. Few mortgage lenders accept this non-traditional down payment, hence the interest of going through a mortgage broker to advise you and ensure you get the best rate.
Eligibility requirements for a personal loan or line of credit:
- Have a credit score of 650 and above;
- Have a positive balance sheet of assets, with no debts or bankruptcy;
- Be able to prove stable and permanent employment for at least two years;
- Have a good credit record, with no late payments or limits overruns;
- Have a minimum budget to pay the transfer tax and notary fees.
When presenting your file, the debt related to the personal loan or line of credit must be added to the liabilities you already have. Your debt ratios will then be calculated and must comply with the financial institution's requirements to qualify for a mortgage loan.
Discover our article: What is the role of a mortgage broker?
4. Buying a close relative's home
It is perfectly legal to buy a close relative's house without any contribution, using a gift of equity as a down payment. This means that the difference between the sale price (say $350,000) and the actual market value of the property (say $420,000) can be considered as the down payment. In this case, the down payment will be $70,000, or 20% of the house price, which will avoid paying insurance.
This strategy is ideal if you have no down payment. It will be set up in collaboration with your mortgage lender who will arrange for an appraiser to estimate the value of the property on the market. The other advantage, if you buy your property from a close relative (sister, father, mother, grandparents), is that there will be no welcome tax to pay. What a great way to save money!
5. Refinancing your mortgage
This solution is only suitable for people who already own a home and want to buy another one. Indeed, when you already pay a mortgage, it can be difficult to save for a down payment, hence the need to refinance.
This option of renegotiating your current mortgage is used to consolidate your debts or to finance other important expenses (renovations, a car purchase, a down payment). In addition, mortgage refinancing involves new conditions for your mortgage.
Another option would be to take out a collateral loan on your home equity and use it as a down payment. This leaves you with two mortgages, which can be quite risky and complicated to manage. Calculating your expenses before embarking on this type of adventure is clearly recommended, as too much debt could result in the mortgage pre-approval denial, resulting in the failure of your real estate purchase project.
Whatever solution you choose to buy your home without a down payment, you should remember that delays will generally be longer than when you buy a home with a down payment. A mortgage broker will be very useful to support and guide you in your search.
Are you planning to buy a property? Consult our practical guide to buying a property, which will guide you through the different steps of the process.
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