Down Payment Loans in Canada

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Prerequisites for Getting a Down Payment Loan

When you are looking for a loan for your down payment or just more money to add to your own savings, you are going to need some of the same things that you would need to get a mortgage.

  • Proof of employment: This is going to be either a letter of employment from your work or 2 of your most recent pay stubs. In some cases both may be required.
  • Credit Check: This is going to show the lender your credit score, your credit history and your debt-to-income ratio. Your DTI should be relatively low if you are looking for a down payment loan because your total DTI (with loan payments, mortgage payments and all other debt) should be no more than 40% of your monthly income. This gives the lenders more confidence in you making your payments on time while covering your bills and other housing costs.
  • Copy of ID: This is usually a government ID like a driver’s license or passport. In most places in Canada, a personal health card isn’t accepted.
  • Bank Statements: A bank account is required to get financing in Canada. Lenders usually require no less than 90 days of bank statements in order to prove you have a bank account, verify your income and show that your account is active.

If you don’t choose to go with this type of borrowed down payment, then the process will be a little different. You would have to apply for approval for government assistance programs. Taking money from your RRSP requires a form you have to sign and bring to the bank. If you are getting a loan or being gifted money from an immediate family member, then you would have to speak to your lender about what they require as proof for the loan or gifted money. This is usually just a gift letter or something that is equivalent to that.

Borrowing Money for an Investment Purchase

If you borrow money for investment purposes, keep in mind that the process is going to be a little bit different. This is because, even if it is your first purchase, you are not going to live in the home. If you don’t intend to live in the home for at least a year after purchasing then there are certain things you are not eligible for such as the RRSP home buyers program, some down payment assistance programs as well as a reduced down payment.

As we mentioned, in Canada as a first time home buyer you are allowed to reduce your down payment to as low as 5% of the purchase price and get a high ratio mortgage. That being said, you cannot do this if you are purchasing the home as an investment property. You must live in the home for the first year after purchase to qualify for this. The minimum down payment required for an investment property is 20%.

If you are choosing to borrow for an investment property, then you would be eligible to use the following options:

  • Personal Loan
  • Line of Credit
  • Credit Card
  • Loan from Family

If you already own a home and are looking to purchase a second property, then another option available to you would be a home equity line of credit (HELOC). You could also use a home equity loan. This works because you are able to borrow money from the existing equity in your current home minus any amounts that you still have owed on the mortgage. This tends to have a much lower interest rate than any other loan or an unsecured line of credit, but it is also risky. This means that the down payment is now a secured loan against another property, and if you default on these payments, you may lose your home.

Ways to Borrow Your Down Payment

When it comes to borrowing money for your down payment, you actually do have a few different options. Some of these options are better than others though. It is important to keep in mind that even though you don’t have to come up with the down payment up front, you now have to pay interest on the money you are borrowing. This means that you should pay close attention to what those costs will be, it will also affect your total approval amount for your mortgage.

Personal Loan

The first option with the lowest interest rate is a personal loan. Personal loans are often very flexible, and you can make the payments on the same schedule as your mortgage. They are more structured and usually can be paid off in 3-5 years. A lot of personal loans are also open loans, meaning that you can put extra money on them whenever you have it and can pay them off early.

Line of Credit

Another way you could borrow money for your down payment funds is with a line of credit. A line of credit works a little differently than a personal loan. They are a form of revolving credit, meaning only the interest is required to be paid, and you can pay off and use up to the credit limit as much as you please. That being said, lines of credit tend to have a slightly higher interest rate than personal loans. They also normally have variable interest rates. This means that The interest rate changes with the prime rate. Another thing to consider about lines of credit is that they don’t require a principal payment, so you can end up leaving them and paying more interest over time.

Credit Card

Using a credit card for a down payment has the highest interest rate of all of the options. Not only that but if you don’t pay back the cash advance within 30 days, then you have to start paying an extremely high interest rate. Cash advance rates are usually higher than the standard 20% used for regular transactions.

Money From Family

A way to avoid interest when borrowing enough money for a down payment is to borrow money from a family. In some cases, family members will just give the money. Either way, the lender may ask for some sort of letter proving the borrowed funds’ down payment sources so it doesn’t seem like the funds appeared out of thin air. Even when it comes to having your own down payments, lenders require proof that the money has been sitting in your account for at least 3 months. They even like to see the transactions where you put the money into personal savings.

RRSP Contributions

While this isn’t necessarily a no-down payment solution, using your RRSP funds to purchase your first home is a great way to avoid the interest rates from borrowing a down payment. This is called the Home Buyers’ Plan and is only available to first-time homebuyers. This plan lets you borrow up to $35,000 from your own savings in your RRSP account for your first home purchase. There is no penalty when taking money from this account, and you have up to 15 years to pay back the funds. Repayment won’t start until the second year after you withdraw funds.

In order to qualify for the Home Buyers’ Program, you must:

  • Be a first-time home buyer
  • Be a Canadian Resident
  • Make the home your principal residence within a year of the purchase
  • Sign an agreement on a qualifying home purchase (your house deposit does not have to be made yet, though)

If you have met all of these requirements then you are able to take the money out of your RRSP penalty free. It is actually a relatively simple process and you are using your own money to fund the down payment for your own home. When you pay back the funds when your repayment period starts, you are given a minimum amount that is required each year and it is all done when you file your yearly tax return.

Down Payment Assistance Programs

Depending on where you live in Canada, there are quite a few provinces that will provide some sort of down payment assistance for real estate to expand your down payment options. There is also a federal program called The First Time Home Buyer Incentive. This program allows Canadians to purchase a home by offering certain Canadians 5-10% of the purchase price, giving the home buyer a larger down payment. This amount does have to be repaid, but it is much less than interest on a loan.

This incentive is for first-time home buyers only and is considered a shared equity amount. How much you give back in equity will depend on when you make the repayment since it affects the portion of the purchase that’s considered shared equity. Currently, if the home appreciates, the government’s portion is up to 8% per year. With depreciation, it will go down to 8% per year.

In order to qualify, you must earn less than $120,000 per year ($150,000 in more populated areas like Toronto or Vancouver). You must also qualify for mortgage default insurance from the CMHC (Canada Mortgage and Housing Corporation). The CMHC is Canada’s equivalent to the Federal Housing Administration in the US. Keep in mind that insurance premiums will be included in the mortgage.

Frequently Asked Questions

  • Is borrowing your down payment a bad idea?
  • What are the monthly payments on a down payment loan?
  • Will a mortgage down payment affect your mortgage rates?
  • Is a mortgage cheaper than rent payments?

Credit Score Needed to Borrow a Down Payment

If you are considering borrowing money from a financial institution for a down payment or just to expand your own resources and have a larger down payment or cover other expenses, the higher the credit score that you can have, the better. Not only do you have to be sure that you can get the down payment, but you also have to be sure that you can get approved for the mortgage as well. 

In order to get a loan most lenders like you have a credit score of at least 620. If you can get a credit score somewhere between 680 to 700, then you are likely to get a much better interest rate. If you can bring your score higher than that then you are likely to qualify for a great interest rate. That being said you still need to qualify for the mortgage.

In order to qualify for a mortgage in Canada, if your down payment is going to be less than 20%, you need to qualify for CMHC mortgage default insurance. This protects the mortgage lender if you default on your payments. In order to qualify for this insurance, the CMHC requires that you must have a credit score no lower than 680. For this reason, in order to get a down payment loan, it is recommended that you have a credit score of around 700 but no lower than 680.

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*Information is based on averages and may vary by institution or lender. It is not intended to address specific circumstances or any individual case.

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