Is it possible to buy a house with no down payment? Homeownership is the ultimate dream of many Canadians, yet not everyone has the funds available for an initial down payment. The good news is that there are ways to purchase a place you can call home, even if you can’t put 5% to 10% down right away. Read on to find out how.
Down Payments: What Are They?
A down payment is a lump sum of money that a buyer is required to pay upfront when purchasing a property. The lender deducts this amount from the purchase price of your home to determine the size of a mortgage loan that you need. If you put down less than 20% of the home’s purchase price, you will also be required to purchase CMHC mortgage loan insurance.
For residential mortgages, a minimum down payment of 5% to 20% is required. The exact minimum down payment amount is:
- 5% for homes with a purchase price of $500,000 or less
- 5% on the first $500,000 and 10% on the portion of the purchase price above $500,000 for homes priced between $500,000 and $1 million
- 20% for homes with a purchase price of $1 million or more
Challenges of Saving for a Down Payment
With home prices continuously rising, it is increasingly challenging for Canadians to enter the real estate market. Especially for young buyers, saving enough to cover the down payment is nearly impossible. As young people diligently try to stock away down payment funds, properties continue to sell for way over asking—making homeownership way out of reach for many.
What’s more, a 5% down payment is no longer enough. As of February 2024, the average Ottawa home costs $651,340, slowly but surely approaching the $1,108,720 mark for GTA homes. This means that purchasing an average home in Ottawa would require a $40k down payment, while buying an average home in Toronto would necessitate $222k down.
Add into the equation the above-normal inflation, increased costs of living, and unusually high mortgage interest rates, and the picture is clear: saving for a first-time down payment in today’s market is incredibly challenging.
Options for Buying a House With No Down Payment
After the 2008 economic crisis, the federal government introduced the requirement for a minimum down payment of 5% of a home’s value.
While no-down payment houses are no longer a thing, there are ways to purchase a home without saving the entire down payment sum in cash.
Government-Backed Programs
The Government of Canada offers several programs and financial incentives to ease the down payment burden for home buyers:
- The First-Time Home Buyer Incentive allows buyers to finance a portion of their home purchase through a shared equity mortgage with the Government of Canada.
- The Home Buyers’ Plan allows individuals to withdraw up to $35,000 annually from their registered retirement savings plans (RRSPs) to buy or build a qualifying home.
- The Home Buyers’ Amount offers a $5,000 income tax credit on a qualifying property acquired during the year.
- The GST/HST New Housing Rebate allows home buyers to rebate a portion of the GST or HST on the purchase price or cost of building their new home.
Of course, under these programs, you will still need to put down a certain amount when purchasing a home. Nevertheless, your overall financial burden associated with mortgage financing will be significantly reduced.
Flex Down or Zero Down Payment Mortgages
If you have absolutely no savings, consider getting a zero down payment or “flex down” mortgage. Today’s zero down payment mortgages aren’t truly “zero down payment,” instead, you would be borrowing the down payment along with the mortgage loan itself. As a result, you won’t need to have any cash at closing aside from the closing costs associated with fees and services necessary to finalize the deal. This means that you would still need to secure funding to cover expenses like legal fees, land transfer taxes, home inspection services, and more. Plus, you would need to have a cash deposit ready when making an offer to the seller, albeit it would usually be a fraction of the typical down payment amount.
Mortgage Down Payment Financing Options
If you need to secure additional funds to cover the down payment on a property, you may use one of the following forms of credit:
- Credit card cash advances. You may technically use a credit card cash advance to cover the down payment, but get ready to face aggressive interest rates.
- Line of credit. A line of credit will likely result in a better interest rate. However, you won’t be able to use the same lending institution for both the mortgage and the line of credit.
- Personal loan. If you don’t have enough savings to cover the down payment, consider taking out a personal loan. With a personal loan, you can work out a repayment plan with a private lender to accommodate your financial situation.
- Gift or no-interest loan from immediate family members. Perhaps the best way to purchase a house with no down payment is to ask for no-interest financial assistance from your family.
Pros of Buying With No Down Payment
Without a doubt, having to put less cash down when buying a home is tempting. Here are the key benefits of no down payment mortgages:
- You won’t need to wait until you have saved enough for a down payment or deplete your cash reserves.
- You can begin building home equity sooner instead of spending money on rent.
- Waiting until you save up for a down payment can mean you won’t be able to afford the same type of home as you would be able to purchase today.
- You can avoid paying CMHC fees by borrowing a down payment of 20%.
Cons of Buying With No Down Payment
The convenience of no down payment mortgages is often compensated with high interest rates and an increased overall amount of debt. Plus, you would typically need a good credit score and history to qualify for a flex-down mortgage.
Tips for Securing a No Down Payment Mortgage
Getting approved for a no down payment mortgage can be challenging. However, certain factors can increase your chances of approval, such as:
- A stable income and a certain level of job security
- A high credit score of at least 650
- No late or missed payments on other liabilities
- Enough savings to cover closing costs
Working with a Mortgage Broker
While buying a house with no down payment may be challenging, working with a certified mortgage broker can help you get approved and secure the most favourable rates and terms possible. Thus, if your dream of homeownership seems out of reach, don’t despair! Contact us today to learn more about your options.
