In the past, it was possible to secure a mortgage loan with no down payment. However, since 2012, the government has mandated a minimum down payment.
The down payment is the portion of the purchase price you pay yourself, with the rest covered by the mortgage provided by your lender. Currently, the requirement is 5% for properties up to $500,000 and 10% for homes exceeding that amount.
With real estate prices having surged dramatically over the last 20 years and salaries not keeping up, saving for a down payment has become increasingly challenging. Nonetheless, if you have a stable job and are consistently paying your rent and credit card bills, you are likely to qualify for a mortgage.
If you find it difficult to provide the initial down payment, there are alternative ways to secure one. Here's an overview.
1. Utilize municipal programs to finance your down payment
Many large cities, such as Quebec City, Montreal, and Laval, offer home ownership programs to assist residents in becoming homeowners. These programs may include purchase credits, interest-free loans, rebates on property transfer duties, or property tax credits.
For instance, Quebec City offers the Quebec Family Access Program, which offers a loan of up to 5.5% of the property's purchase price. This credit helps finance your down payment without accruing interest. However, the program only applies to the purchase of a new house.
Eligibility criteria for the Quebec Family Access Program include:
- Not having owned a property in the last 5 years.
- The property must be a new single-family home or a divided co-ownership.
- A maximum income of $120,000.
- The loan must be repaid upon refinancing, selling, or renting the property, and at the end of the mortgage term.
2. Using your RRSPs for a down payment
The Home Buyers' Plan (HBP) is a federal program that allows you to use funds from your Registered Retirement Savings Plan (RRSP) to purchase or build a home. You can withdraw up to $35,000 from your RRSP ($70,000 for a couple) to use as a down payment or for other home-related expenses, such as notary fees, transfer taxes, renovations, or furniture, without facing tax penalties.
After making a withdrawal, you have two years to begin repayments. Payments are made annually and can be made over a maximum of 15 years. Early repayments are permitted without penalties.
Eligibility for the HBP includes:
- Having a stable and permanent job
- Maintaining a good credit history
- Having a relatively low debt ratio
- Ensuring RRSP funds 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 for securing a down payment for your real estate project. The main difference between the two is that a personal loan requires fixed, regular payments on a set schedule, while a personal line of credit offers more flexibility in how and when you make payments.
Both can be used as non-traditional down payments, but you’ll need a strong credit record and bank approval.
However, please note that finding a lender who will accept a non-traditional down payment can be difficult. Few mortgage lenders are open to this type of financing, so working with a mortgage broker could help you find the best rate and terms. To be eligible for a personal loan or a line of credit, you must:
- Have a credit score of 650 or higher.
- Have a positive balance sheet with no existing debts or bankruptcies.
- Demonstrate stable and permanent employment for at least two years.
- Maintain a good credit score history with no late payments or overlimit issues.
- Have sufficient funds to cover the transfer tax and notary fees.
When submitting your application, the debt from the personal loan or line of credit will be added to your existing liabilities. Your overall debt ratios will then be assessed and must meet the financial institution's criteria to qualify for a mortgage loan.
4. Buying a close relative's home
It is completely legal to purchase a close relative’s home using a gift of equity as your down payment, which means you don’t need to provide a cash down payment.
For instance, if the sale price of the property is $350,000 and its market value is $420,000, the $70,000 difference can be used as the down payment. This represents 20% of the sale price, which could allow you to avoid paying mortgage insurance.
This strategy is particularly useful if you don’t have the funds for a down payment. You will need to work with your mortgage lender, who will arrange for an appraiser to assess the property’s market value. Additionally, purchasing from a close relative (parent from a child or child from a parent, but not siblings) means you can avoid paying welcome tax, leading to significant savings.
5. Refinancing your mortgage
Refinancing your mortgage can be a practical option if you already own a home and are looking to buy another. Saving for a down payment while managing an existing mortgage can be challenging, making refinancing a valuable tool.
This strategy involves renegotiating your current mortgage to consolidate debts or finance significant expenses, such as home renovations, a car purchase, or a new down payment. Keep in mind that refinancing will come with new mortgage terms and conditions.
Alternatively, you could take out a collateral loan using your home equity as the down payment. However, this means having two mortgages, which can be risky and complex to manage. It's essential to carefully evaluate your financial situation before proceeding, as excessive debt could lead to mortgage pre-approval denial and threaten your real estate purchase.
---
Regardless of the method you use to buy a home without a down payment, be prepared for a potentially longer process compared to buying with a traditional down payment. Partnering with a mortgage broker can be extremely helpful in navigating your options and providing guidance throughout the process.
Are you looking for a mortgage loan?
XpertSource.com can help you in your efforts to find a mortgage broker. By telling us about your project, we will refer you to top-rated experts, free of charge! Simply fill out the form (it only takes 2 minutes) and you will be put in contact with the right experts.
