Is It Possible to Buy a House Without a Down Payment in Canada?

Author: Chris Allard

Category: First Time Home Buyers, Helpful Tips

Wondering whether you can purchase a home without a down payment in Canada?

For many first-time home buyers, saving up for a down payment can become a years-long endeavour, especially with real estate prices skyrocketing. Indeed, if you were to purchase a $500,000 home, you would need to put down at least $25,000 – a significant burden for most young families. Luckily, there are options like a “no money down” mortgage in Ontario, which can help you achieve your homeownership goals faster. Let’s take a look!

What Does ‘No Down Payment’ Really Mean?

Before 2008, some lenders offered a zero-down payment mortgage, but things shifted after the financial crisis. With stiffer regulations in place, borrowers are now required to submit a down payment when obtaining a mortgage.

As such, when purchasing a home in Canada, you are required to put down a percentage of your home’s price, which can range from 5% to 20%, depending on the purchase price:

$1,000,000 or more: The minimum down payment is 20% of the purchase price.
$500,000 to $999,999: The minimum down payment is 5% on the first $500,000 and 10% on the remaining amount.
$500,000 or less: The minimum down payment is 5% of the purchase price.

Nonetheless, a “no money down” mortgage in Ontario is still possible—albeit it requires borrowing the down payment in addition to the mortgage itself. Also known as “flex down,” this process can be initiated with your mortgage lender and will involve a separate payment on top of your mortgage. Legal sources for the borrowed down payment amount include a personal loan, a personal line of credit, a home equity line of credit (HELOC), or a loan from a family member.

It is important to note that you won’t be able to get a CMHC-insured mortgage if you borrow money for a down payment. Because CMHC insurance is required for any mortgages with down payments of less than 20%, you will need to either borrow 20% of the home’s purchase price or go with a private mortgage lender or an alternative mortgage insurer instead.

Government Programs and Assistance for No Down Payment

While there is no government program to allow no down payment at all, there are a few ways to save on your mortgage expenses or reduce monthly payments.

First-Time Home Buyer Incentive

The First-Time Home Buyer Incentive is intended to help first-time homebuyers reduce their regular mortgage payments. It works as a shared-equity mortgage with the Government of Canada, which offers to put between 5% and 10% of the home’s purchase price toward the down payment. Because the program is “shared equity”, the Government of Canada will have a share in any ups or downs of the property’s value, up to a maximum gain or loss of 8% per year.

Eventually, the buyer would need to repay the incentive based on the percentage of the market value of the home at the time of repayment.

RRSP Home Buyers’ Plan

The Home Buyers’ Plan is a government program that allows first-time homebuyers to withdraw from their registered retirement savings plans to purchase or build a qualifying home. Currently, you can withdraw up to $60,000 tax-free ($120,000 for a couple) to use towards the down payment on your home.

The Home Buyers’ Plan allows you to pay back the withdrawn amounts within a 15-year period, with at least 1/15th of the total amount being paid each year.

CMHC-Insured Mortgages

The CMHC Mortgage Loan Insurance allows Canadian homebuyers to put down less than 20% of the property value. While you won’t be purchasing a home without a down payment, you will be able to put down 5% or more, depending on the home’s price. Keep in mind, however, that the CMHC insurance cost will be added on top of your mortgage.

Lender Financing Options for No Down Payment Mortgages

In addition to government programs and incentives, you may benefit from cash-back mortgage financing or working with a private lender instead of a traditional bank or credit union.

Cash-Back Mortgages

Buying a new home comes with a plethora of fees and expenses, on top of your down payment and the actual mortgage amount. To help you cover costs like the land transfer tax, lawyer’s fees, moving costs, closing costs, and other miscellaneous expenses, some lenders offer cash-back mortgage products.

If you qualify for the program, you will be able to receive a certain amount of cash back, depending on the size and term of your mortgage. Get in touch with our team to learn more about the specifics of cash-back mortgages offered by Canadian lenders.

Private Lenders

Private mortgages are not federally insured by CMHC and have overall fewer regulations as compared to traditional mortgages. As a result, you will have more flexibility with using borrowed funds for the down payment or obtaining a high-ratio mortgage with a smaller down payment amount. However, non-insured high-ratio mortgages mean more risk for the lender, resulting in considerably higher interest fees to offset these risks.

Risks and Downsides of No Down Payment Mortgages

Just like any other mortgage product, no down payment mortgages in Canada come with a range of risks and considerations to be aware of.

Increased debt burden: Borrowing money for a down payment increases your overall debt burden, which can strain your budget and impact your ability to secure additional credit in the future.
Higher interest costs: Most forms of borrowed funds for down payment, such as credit cards and personal loans, come with high interest rates. Over time, this additional debt can significantly increase the overall cost of your home purchase.
Risk of negative equity: In volatile real estate markets, there is a risk that the value of your new property decreases over time. As a result, you will end up owing more on your mortgage and the down payment loan than the property is worth.
Impact on credit score: Taking out a substantial loan to cover the down payment expense can negatively affect your credit score. Additional debt inquiries while seeking approval, combined with high credit utilization ratios, can lower the score, potentially making any future borrowing more expensive.
Loss of financial flexibility: Mortgage payment alone will eat a good portion of your monthly budget, and committing to repaying the borrowed down payment along with the mortgage will reduce your financial flexibility even further.
Repayment pressure: The obligation to repay borrowed funds, especially if interest rates rise, can add financial pressure to your day-to-day life. Meeting these repayment obligations can become challenging if your income decreases or unexpected expenses arise.

How to Qualify for a No Down Payment Mortgage

Buying a house without a down payment in Canada can be challenging but never impossible. There are a few factors that can help you get approved and speed up the process of buying your first home. Follow these steps to qualify for a new down payment mortgage in Canada:

1. Have a Good Credit Score

Each lender has its own credit score criteria, but, as a rule of thumb, the higher your credit score – the better. Applicants with healthy credit carry less risk for the lender, which means that you will be more likely to get approved and receive more favourable rates and terms.

Most of the time, you will need a credit score of at least 650, ideally with no late or missed payments on any of your credit products within the last couple of years. Alternative lenders may be more lenient, but prepare to pay additional interest costs.

2. Prove Your Employment

Just as with other types of mortgages, a “no money down” mortgage in Ontario requires proof of employment and income. You will be asked to provide a letter of employment, a couple of recent paystubs, and tax returns for the last 2 to 3 years.

When evaluating your employment, the lender will look at a few things:

Income: How much money do you make, as opposed to how much you want to borrow?
Stability: How long have you been working at your current job and in the same industry, and how stable is your job?
Loss of income: If you lost your income, would you still be able to make your payments on time?

3. Prepare to Pay Closing Fees in Cash

Even when borrowing money for the down payment, you will still need to pay closing costs in cash. Typically, you can expect to pay between 2% and 5% of your home purchase price on the day of the closing. These fees will cover expenses like legal fees, land transfer tax, title insurance, and more.

4. Use Other Income Sources

Your lender may consider other sources of income aside from your main employment. These can include:

Rental income or other investment income
Spousal or child support payments
Pension benefits

If you are self-employed, you will need to prove your income by providing your bank statements and tax returns, as opposed to traditional letters of employment and recent pay stubs.

Tips for Buying a Home with No Down Payment

Figuring out how to purchase a home without a down payment can be tricky, but it isn’t impossible. Follow these tips to make your once-distant dream of owning a home a reality.

1. Assess Your Financial Situation

First and foremost, review your existing financial situation to evaluate whether taking on additional debt in the form of a down payment loan is feasible. You can also obtain a free credit report from Equifax or Transunion to review your credit history and make improvements if necessary.

2. Research and Compare Your Options

While you should still look at traditional banks, don’t shy away from considering all of your options, including alternative and private lenders. Alternative lenders may be more lenient with approval criteria and more likely to issue high-ratio mortgages with no down payment.

3. Consult a Mortgage Broker for Specialized Advice

Look for a mortgage broker experienced with no down payment purchases. At Chris Allard, we know all the ins and outs of available contract terms, offers, and negotiation strategies to help you secure the best possible deal on your zero-down mortgage.

Is a No Down Payment Mortgage Right for You?

If you are serious about purchasing your first home sooner, a no-down payment mortgage in Canada might be the right option for you. However, there are a few conditions that you must meet before applying for a zero-down mortgage:

Above-average credit
A stable income
Being able to handle a decrease or loss of income
Being able to afford a monthly mortgage payment along with other life expenses

If your financial situation is not so stable, however, increasing your debt burden with a borrowed down payment may not be the best decision. Instead, focus on paying off the existing debt, putting money aside for a future home purchase, and improving your day-to-day financial situation.

Final Word

If saving up for a down payment on your first home feels like forever, it may be the time to look into how to purchase a home without a down payment. Once you review your options and weigh all the pros and cons, you will be able to take the necessary steps toward securing your flex down mortgage, and we will be helping you every step of the way.

At Chris Allard Mortgage Team, we have decades of experience helping aspiring Canadian homeowners to finance their dream homes, with or without a down payment. Get in touch with us today to schedule your free consultation!

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