No Down Payment Mortgages

Saving for a down payment can take years, particularly if you aim to contribute more than the minimum required amount. With home prices continuing to rise in many major cities, even a 5% down payment can feel like a substantial financial burden. That’s why the idea of a no down payment mortgage in Canada may seem like an appealing option.

Here’s everything you need to know about no down payment mortgages in Canada to help you make the best decision for your financial situation.

Key Points

With a no down payment mortgage, you won’t need to pay anything at closing. Instead, both your mortgage and down payment are financed by a lender.

If you're getting a mortgage from a federally-regulated lender, you'll need to borrow your down payment funds from an alternative source.

However, for CMHC-insured mortgages, borrowed funds cannot be used for the down payment. To avoid CMHC insurance, you’ll need to make at least a 20% down payment, or you’ll need to work exclusively with an alternative lender for your mortgage.

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Can I Get a No Down Payment Mortgage in Canada?

While there’s technically no such thing as a "no down payment mortgage," the term generally refers to a situation where you don’t use your own savings for the down payment. Instead, you borrow the down payment funds, meaning you’re taking on additional debt. This is why it’s crucial to ensure you’re in a strong financial position before considering this option.

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Pros and Cons of Borrowing for a Down Payment

Borrowing for a down payment can offer several benefits, but it also comes with certain risks and challenges. Here are some of the key pros and cons to consider:

Pros

• No More Renting: Saving for a down payment can take several years, but by borrowing, you can immediately transition from renting to owning. Each payment you make on your mortgage contributes to building equity in your home, rather than just paying rent.

• Avoid Mortgage Default Insurance: If your down payment is less than 20%, you’ll typically need to purchase mortgage default insurance (CMHC insurance), which can cost thousands of dollars. By borrowing enough for a 20% down payment, you can avoid this added cost.

• Grow Your Wealth: A home is often one of the largest assets a person owns. The sooner you buy, the more time you have to build equity, which contributes to growing your net worth.

Cons

• Falling House Prices: While a 20% down payment typically offers some protection against owing more than your house is worth, borrowing your down payment increases your risk. If home prices decline, you could find yourself in a situation where your home’s value is less than your total investment.

• Lower Equity: If you borrow money (e.g., through a home equity loan or HELOC) to cover your down payment, you’re essentially reducing your home’s equity. This can limit your financial flexibility down the road.

• Increased Debt: Borrowing for your down payment means taking on additional debt, which can raise your monthly payments and potentially lead to financial strain. It can also negatively affect your debt-to-income ratio, which may limit your borrowing potential for the mortgage itself.

• Higher Interest Rates: The interest rates associated with borrowing your down payment can be significantly higher than your mortgage rate. This means you could end up paying more in interest over time, making the loan even more expensive.

How Does a No Down Payment Mortgage Work?

A no down payment mortgage in Canada functions similarly to a regular mortgage, except that no money is required upfront for the down payment. The only funds you’ll need are to cover standard closing costs.

Both your mortgage and down payment are funded by lenders, but the government doesn’t allow you to borrow your down payment from a federally-regulated lender, such as a bank or trust company. Instead, you'll need to obtain your down payment financing from an alternative lender.

Once you secure the down payment funds from an alternative lender, you’ll make payments to that lender, just as you would make payments to your mortgage lender.

ACMHC Insured Mortgages: No Down Payment Restrictions

Before July 1, 2020, borrowers could use non-traditional sources or borrowed funds for a down payment of less than 10%, as long as they had a good credit score. However, the Canada Mortgage and Housing Corporation (CMHC) now prohibits the use of borrowed funds for the down payment if those funds increase your debt. This includes loans and any other sources that would add to your debt load.

What About Sagen and Canada Guaranty?

While CMHC no longer permits this, both Sagen and Canada Guaranty still allow qualified buyers to borrow their down payment.

Sagen Option

Sagen permits eligible borrowers to use various sources of funds for their down payment, including:

• Personal loans

• Lines of credit

• Credit cards

• Monetary gifts from individuals who are not related to the borrower by family or legal ties

However, it’s important to note that any borrowed funds must be included in the Total Debt Service (TDS) ratio calculation.

Canada Guaranty

Canada Guaranty offers its Flex 95 Advantage program, which allows borrowers with strong credit to use 5% equity from a variety of sources that are independent from the purchase, such as:

• Personal loans

• Lines of credit

• Lender credit

• Gifts or grants

Similar to Sagen, Canada Guaranty requires that the repayment of any borrowed funds be factored into the TDS ratio.

Can You Get a No-Down Payment Mortgage with an Alternative Lender?

Private mortgages, which are not federally insured by organizations like CMHC, generally have fewer regulations than traditional mortgages. This can provide more flexibility when using borrowed funds for a down payment. However, since these high-ratio mortgages are not insured, alternative lenders take on more risk. To compensate for this, they often charge higher interest rates.

Types of Loans You Can Use for a Down Payment

There are several ways to secure a down payment without saving up the full amount yourself:

Line of Credit

A line of credit can be a good option for your down payment. This type of credit offers revolving access to funds as needed, with a flexible repayment schedule. However, it’s important to note that the line of credit cannot be from the same bank providing your mortgage.

Personal Loan

If you're in strong financial standing but want to purchase a home sooner, a personal loan could be a viable option. You can take out a lump sum, use it for your down payment, and then repay the loan in installments, similar to how you’d repay a mortgage.

Credit Card

Using a credit card for your down payment is generally not recommended. Charging 5% or more of your home’s purchase price could lead to significant credit card debt, especially with average interest rates around 20%. This means you could end up paying a lot more in interest over time.

Borrowing from a Family Member

If you have a generous family member, borrowing the down payment from them could be an option. In this case, you would need to provide your lender with a gift letter to confirm that the funds are a gift, not a loan.

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How Do You Improve Your Chances Of Being Approved For A No Down Payment Mortgage?

Getting approved for a no down payment mortgage can be a challenge. However, there are a few factors you can work on to improve your chances of being approved.

Credit Score

While each lender has its own set of criteria, generally, lenders will want you to have a good credit score. This means you’ll need a credit score of at least 650. In addition, you’ll want to have no prior late or missed payments on any of your credit products within the last year or two.

Employment

There are three things a lender looks at when evaluating your employment:

• Income – How much money you make in comparison to how much you want to borrow.

• Stability – How long have you had your job and how stable it is.

• Loss in income – If you were to have a drop in income, would you still be able to make your payments?

Closing Fees

Closing costs are still required to be paid in cash. Typically, it can cost 1 to 2% of your home purchase price (not including the down payment). Thus, you’ll need to have that much cash available by closing day. Usually, closing costs are about 2% to 5% of the purchase price.

Other Income Sources

Your lender may accept other forms of income besides employment income, such as the following:

• Pension benefits

• Rental income or other investment income

• Spousal or child support payments

Should You Get A Mortgage With No Down Payment?

A no down payment mortgage in Canada sounds like a great idea, especially if you’re renting an apartment while trying to save for your first home.

There are a few conditions that should be met before you consider a no down payment home loan:

• A stable income

• Above-average credit

• Being able to afford both a monthly mortgage payment and other life expenses

• Being able to financially handle a decrease or loss of income

If these conditions describe your current financial situation, a no down payment mortgage may be a good idea. In some cases, you could potentially benefit from it. Just remember that while you might think you can handle a no down payment mortgage, a lender still needs to agree.

Unfortunately, if none of the above conditions describes you and your financial situation, then a no down payment mortgage is probably not a good idea for you. Instead, we suggest you continue to save while rethinking your current spending and saving strategies.

The Bottom Line

If saving for a down payment is taking longer than you'd hoped, a no down payment mortgage might be worth exploring. Deciding to go this route early on gives you the opportunity to plan carefully, assess your options, and take the necessary steps toward homeownership.

However, buying a home without having cash on hand is a significant decision. Take your time to evaluate all the potential outcomes and ensure you're fully prepared before moving forward.

No Down Payment Mortgage FAQs

Can I Finance 100% of a Home Purchase?

In Canada, it is possible to finance 100% of a home purchase, meaning you could borrow the entire amount needed to buy a home without using your own savings for a down payment. However, you will need to borrow the down payment funds from a lender or another source that is not associated with your mortgage lender. Typically, this requires working with an alternative lender to secure the necessary funds.

Can I Use Other Alternative Income to Qualify for a Mortgage?

Yes, lenders may accept non-traditional sources of income to strengthen your mortgage application. This can include income from pensions, disability benefits, child support, or government assistance programs. These income sources can help boost your overall financial profile when applying for a mortgage.

Can You Purchase a Home with a Partial Down Payment?

Yes, you can purchase a home with a partial down payment by borrowing the remaining amount needed to reach the required down payment. Similar to a no down payment mortgage, this could involve using a line of credit, credit card, personal loan, or a monetary gift. Additionally, you may qualify for down payment assistance programs offered by federal or provincial governments.

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