Zero Down Mortgages in Canada: Buying a House With No Down Payment

Just this month, the Canadian Real Estate Association reported the MLS Home Price Index was up 23.4% year-over-year. That's an awfully big jump in home prices for one year. For those hoping to get into the market, those stats are somewhat discouraging, as home prices go up, so does the amount you need for a down payment.

One of the biggest challenges to buying real estate, especially for young buyers looking to make their first purchase, is saving for that dreaded down payment. But there is a way to buy a home without having to save a big down payment. Here's what you should know about no down payment mortgages (or zero down mortgages), how they work, and if this is the right route for you to reach your real estate goal.

The first thing you should know though, the term no down payment is confusing. You still have to put a down payment on a home, but with a zero down mortgage, you’re able to borrow that payment. So while it is possible, it can be more difficult depending on your financial situation.

How does a down payment work in Canada?

Before we get into no down payment mortgages, and the ways you can sidestep saving for a down payment, it’s important to have some foundational knowledge of how a down payment works. According to the Canada Mortgage and Housing Corporation (CMHC), you must have a down payment of at least 5% of the purchase price for homes selling for less than $500,000 and 10% for homes selling above that. 

Here’s an example: the average price of a condo in the Greater Toronto area is around $688,137 according to RE/MAX. You would need a minimum down payment of 10% ($68,813) because it is over the $500,000 threshold. According to the same report, an average condo in Calgary is $263,480, which means you would only need a 5% cash down payment of $13,174. 

Another wrinkle to this system is the CMHC’s requirement for mortgage default insurance for any mortgages with a down payment of less than 20%. This will add to your overall costs, as these mortgage insurance rates can be as high as 4% when using a 5% down payment. One way to avoid the insurance is to borrow a 20% down payment. 

Do mortgages with no down payment even exist?

In Canada, it’s difficult to buy real estate without a down payment, but it is possible to buy real estate without saving for a down payment. You can borrow the money for a down payment from a financial institution. Borrowing money from a lender means you are sidestepping the often-challenging process of saving for the down payment. It also means, however, that you are taking on debt on top of debt. In other words, you will need to repay the down payment while you are paying off a mortgage. It’s a route only those with solid financial footing should consider taking. Also, those with bad credit would have a really difficult time getting approved for this option

How does a zero down mortgage work?

A zero down mortgage is when you borrow money for your down payment, meaning you don’t need any cash at closing. Of course, it is very important to know about something called closing costs, which are the fees and services you need to pay to finalize the deal. This includes legal fees, land transfer taxes, home inspection services, and more. These fees and charges are not included in a down payment. You will need to secure separate funding to cover these costs. 

You will also need a deposit ready when making an offer to the seller, but that can usually be a percentage of your down payment. No matter where you live in Canada, this is an option, if you’re approved for it.

Mortgage down payment loan options

If you need money to cover the down payment on a home, there are various forms of credit available: 

Credit card: Borrowing for a down payment using a cash advance from a credit card is highly inadvisable. You will be expected to pay it back within 30 days or start paying a punishing interest rate of around 20%. Plus, cash advances tend to get charged an even higher interest rate. Avoid this method at all costs. 

Line of credit: You can usually obtain a more favourable interest rate through a line of credit. But keep in mind, you cannot use the same lending institution, such as a bank, for both the mortgage and the line of credit to pay for the down payment. 

Personal loans: Probably the most advisable way when going the no down payment mortgage route. With a personal loan, you can work with a financial lender on a repayment plan that makes the most sense for your financial situation.

Bank of Mom and Dad: CIBC bank reported that 30% of Canadian homebuyers in 2020 received financial help from their families. This increasingly common option should be explored if possible. Your family probably won’t charge interest or even expect repayment in the near term. 

How to get approved for a down payment loan 

If you’re preparing to borrow money for a down payment, it’s a good idea to understand what the lender will be considering when reviewing your application. Here are two key factors: 

1. Employment: As we mentioned earlier, you will need to be on a solid financial footing with a steady flow of income. Your employment should be stable and your income suitable enough that you can make payments on both a loan and mortgage without obvious distress.
2. Credit score: You don’t need an amazing credit score to successfully obtain a down payment loan, but it can’t be in the toilet either. A history of reliable repayments will certainly help your cause.

What credit score do you need to buy a house with no down payment?

Credit scores in Canada range between 300 and 900, and most lenders will want something in the 600 or more zone to approve a down payment loan. Keep in mind you are in need of two loans – one to cover your down payment and another for a mortgage. So you will need to borrow from two different financial lenders. Are you able to repay two loans at the same time – along with other expenses in your life? Lenders will want to consider whether you’re able to take on the financial burden and not go under.

And don’t forget about those closing costs you will need to cover – legal fees to finalize documentation, inspection services (not required but recommended), and land transfer taxes, which vary depending on your province. Expect these costs to add up to thousands of dollars. One to four percent of the purchase price is considered average for closing costs alone.

Can You Purchase a Home with a Partial Down Payment?

In short, yes you can. You can take out a loan for the remainder of the down payment, use an existing Line of Credit, or contact the Home Assistance Network. They’re a private financing company that helps those who have partial down payments by offering a loan for the remainder of the expenses associated with purchasing a home. The reason so many Canadians use them is they have a 92% approval rating and consider applicants with all credit scores.

Is it a good idea to get a mortgage with no down payment?

Buying your first home is one of the biggest decisions you’ll make in your lifetime. And doing it with a down payment loan adds complexity to an already complex process. Here are some pros and cons to moving forward with a no down payment mortgage plan:

PROS

1. You will build equity through real estate by paying a mortgage versus paying rent every month. With a mortgage, each payment goes to paying off your debt and getting closer to completely owning your home.
2. Getting a down payment together that is 20% of the purchase price can be extremely challenging. However, if you borrow at least a 20% down payment you will avoid the CMHC default insurance which will save you thousands of dollars and reduce your monthly mortgage payments.

CONS

1. The single biggest downside is the fact you will have to serve two loans as opposed to just the one mortgage loan. If you have commitments like car loans, credit card payments, or building maintenance fees, you could easily be overstretching yourself. 
2. You are also at the mercy of rising and falling interest rates. If the benchmark interest rate goes up when it comes time to renew your mortgage after five years, you will be on the hook for higher mortgage payments. You need to make sure your long-term financial outlook is stable.

How to save for a down payment on a house

Even if you’re planning to buy a home with a no down payment mortgage you will still need to at least come up with funds to cover the closing costs. Here are some simple steps to get you saving for a down payment and/or closing costs.

1. Eliminate some lifestyle spending choices like pricey food delivery services. Those door-delivered restaurant meals can really take a bite out of your finances. 
2. Consider the cost of your transportation. If you drive, ask yourself if you really need a vehicle and all the associated costs that come with it. 
3. Follow a budget and try to be disciplined. Treating yourself occasionally is fine, but make sure you stay on a monthly spending plan. 
4. Book your ticket on a staycation for the foreseeable future. Travel is fun and memorable, but airline tickets and hotels will empty your bank account.
5. Automate your savings so that you are putting aside money for your new home every month without even thinking about it. 
6. Monitor your credit score (it’s free) and learn what behaviours improve it. The better your credit score, the better your chances of securing lower interest rates, potentially saving you thousands of dollars. 

Government programs that help Canadian homebuyers

It’s generally agreed upon that home buying is good for the economy (and good for the banks), so various levels of government tend to create incentives for first-time homebuyers. 

Here’s a brief overview of what’s available: 

Thinking of buying a home?

If you need some help getting that first home, Spring Financial is here to discuss ways you can reach your goals. You can apply directly on our website and one of our licensed agents will contact you to help you with your mortgage options. We also offer home equity loans and lines of credit, as well as personal loans if you need a little extra cash to help make your new house a home.