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The dreaded down payment often prevents young Canadians from purchasing their first home for years, and with house prices rising in many of the country’s largest cities, even 5% of the buying price is usually more than most people can afford. So it’s fair that when you hear about the possibility of a no-down-payment mortgage, you’ll want to give it serious thought.
Here’s everything you need to know about no down payment mortgages so you can make the best decision for you and your budget.
Does No Down Payment Mortgage Exist?
Buying a house with no down payment saved does not mean you won’t have to make one; it simply means you won’t be using your own hard-earned and saved money to fund the down payment. It means you’re going to borrow your down payment (at least 5% in Canada), which means you’ll end up with even more debt. This is why it’s critical to have a solid financial foundation before taking on more debt than is technically necessary.
The only difference between a no down payment mortgage and a standard mortgage is that no money is required at closing. The only money you’ll need is enough to cover the regular closing expenses. A lender will fund both your mortgage and your down payment.
However, whether the mortgage lender is a bank or a federal trust organization, the government prohibits Canadians from borrowing their down payment from them. As a result, you’ll have to locate a different lender for your down payment.
Once you’ve found an alternative lender and secured the funds you’ll need for a down payment, you’ll simply make payments to your alternative lender as you would to your bank.
Types of No Down Payment Mortgage in Canada
You can get a down payment without having to save for it in a few different ways:
- A credit line is a type of loan. For your down payment, you can use a line of credit. It can’t, however, be from the same lender as your mortgage.
- Obtain a personal loan. This could be a wonderful option for someone who has excellent financial standing but does not want to wait any longer to buy a home.
- A credit card is required. This is definitely the worst option, as charging at least 5% of the purchase price of your home on a credit card might leave you in years of debt.
- Taking a loan from a family member. If you have a generous family member then you could potentially borrow your down payment from them.
The Benefits and Drawbacks of Borrowing for a Down Payment
Borrowing for a down payment has obvious benefits, but it can also provide a number of obstacles.
- No more renting — saving for a down payment can take several years before you have enough money to purchase a home. Borrowing allows you to start investing right away and build equity in your property. Rather than squandering money on rent, every payment you make contributes to the purchase of your home.
- Avoid mortgage default insurance – If you put down less than 20%, you’ll be required to get mortgage default insurance (CMHC insurance), which can cost thousands of dollars. You won’t have to pay mortgage default insurance if you borrow the entire 20%.
- Increase your wealth – A home is typically one of the major assets a person has. The sooner you acquire it, the more equity you’ll have, which will help you increase your net worth.
- House prices are dropping — When you put down a 20% down payment, you are usually protected against owning more than your home is worth in the event that house values decline.
- Reduced Equity – If you’d like access to a HELOC, you won’t have enough equity as most lenders require your home to have at least 20% in equity.
- Increased debt – If you borrow the down payment, you’re adding to your debt load. This could result in higher monthly payments, which can be financially taxing over time. It can also affect your debt-to-service ratio, which affects the amount you wish to borrow for a mortgage.
- Higher interest rates – The interest rates connected with borrowing your down payment can be quite high, often even exceeding the interest rate on your real mortgage.
- Personal relationships are at risk — If you borrow money from family for a down payment and are unable to repay it on time or at all, you can quickly burn bridges.
Should You Get a No Down Payment Mortgage?
A no-down-payment mortgage sounds like a terrific idea, especially if you’re currently renting an apartment and attempting to save for your first home. However, before you are lured by the concept, you must determine whether this financing choice is the ideal approach for you at this time. There are a few requirements that must be completed before you contemplate a house loan with no down payment:
- Having a steady income
- Creditworthiness that is above average
- Being able to pay a monthly home payment as well as other living expenses
- Being able to cope financially with a reduction in or loss of income
If all of these factors apply to your present financial circumstances, a no-down-payment mortgage is a fantastic idea, and you could benefit much from it; nevertheless, keep in mind that while you may believe you can handle it, a lender must still decide whether or not they agree.
Unfortunately, if none of the aforementioned factors apply to you and your present financial circumstances, a no-down-payment mortgage is not a smart idea right now. Instead, we recommend that you continue to save while reconsidering your current spending and saving tactics.
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If you’re having problems saving for a down payment on a home and are frustrated by how long it’s taking, now is the time to investigate the prospect of buying a property with no money down. Early decision-making is a good idea since it allows you to take your time and create all of the necessary plans and do all of the essential measures.
Just keep in mind that buying a property with no cash on hand is a big decision, and just because you qualify for a mortgage and another loan to meet your down payment doesn’t guarantee it’s the best option for you. Take your time and think about all of your options before jumping in.
At Lionsgate, we specialize in helping people obtain funding private mortgages for land purchases as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, leave us a message and we will try to connect you with local realtors and sourcing for financing.
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