Can you get a zero-down mortgage in Canada?

When it comes to buying a home, the down payment is probably the biggest barrier that new homebuyers face. For this reason, it is common for buyers to try and buy with a lower down payment in order to purchase their home sooner. Especially with prices as high as they are, this option has proved useful for many homebuyers.

Generally, when it comes to buying a home, the lowest possible you can go on a down payment is 5% of your home's purchase price. But what if there was another way to get your home while paying even less?

It turns out there may be. Though zero-down mortgages are rare in Canada, there are some ways you may be able to make it work. However, this option will not be suitable for everybody. In general,your mortgage will be riskier the less you pay, and your mortgage terms may also become less favourable. But if you have no other options and are willing to put in a bit of extra work, this may be the path for you.

In this article, we will explore your options for a zero-down payment mortgage in Canada, how to qualify, and whether or not it is right for you.

Do zero-down payment mortgages exist in Canada?

You might be surprised at this article’s topic if you thought that a zero-down payment mortgage was not an option in Canada. Technically you're right, but that isn’t the whole story.

The vast majority of lenders in Canada will not offer you a mortgage with no down payment at all. In fact, the more highly regulated major lenders legally could not if they wanted to. 

In most cases, the lowest you can go is 5% of your home's purchase price. This is only available for homes under $500,000 and will incur mortgage default insurance costs. 

But, just because you can't get a zero-down payment mortgage doesn't mean that the down payment money has to be your own. It is possible in some cases to use borrowed money as the down payment to borrow more money for a mortgage, resulting in effectively zero-down on your part. This is the basic principle that makes zero-down payment mortgages possible in Canada.

How does a zero-down mortgage work?

Essentially, if you want to put zero-down upfront on your mortgage, you will need to get the money somewhere. There are a few options where you may go for this loan.

Naturally, this comes with some complications. The first and most obvious is that you are now taking on two separate debts to buy your home. This can put you at a lot of risk as a borrower and will mean higher monthly costs requiring strong money management skills.

Further, lenders don't just give you a mortgage if you show up with a down payment. They want to know where the down payment came from and that you have the money to support the payments. If they know you went into deep debt to get your down payment funds, they might just disqualify you from getting the mortgage anyway. You may be required to shop around to different lenders willing to work with someone in your position.

On top of everything else, you will need a great financial profile to qualify. Obviously, your savings aren't great if you had to take out a loan for a down payment, and now your debt service ratios may not be great either. To make up for this, you will have to have an excellent credit score and a high and stable income to boot.

Where does the money come from?

When looking to put zero-down on a house, there are a few places you can look to find funding.

Borrowing money from family

One increasingly common option among young home buyers is to receive money from parents or a close family member to help buy a home. There are two ways this can be handled. 

The first is simply a gifted down payment. With a gifted down payment, your money will not impact your debt ratios, as it is technically not considered borrowed. The gifter is legally not allowed to collect any repayment for this gift. If you are not self-employed, this gift can make up the entirety of your down payment.

If you have borrowed money from a family member that you intend to pay back, like the rest of the options listed here, you will need to inform your bank about the repayment and potential interest on this loan so they can take it into account when qualifying you.

Personal loans

Another option may be to get a personal loan. Personal loans can be found at several different institutions, though you will likely have to pay a pretty hefty interest rate for your borrowed money. This may be a good option if your down payment is very small, such as for an inexpensive home.

Personal lines of credit

A third option would be a line of credit, which will have better interest rates than personal loans. However, you will likely need to get a line of credit from a different lender than you get your mortgage from, and the same debt service rules will apply if you are making regular payments on your line of credit.

Borrowing from home equity

Finally, many homeowners choose to fund a second property with equity from their first. This is technically borrowed money, though since it is secured against your home most people simply see this as using your enquiry directly. Unfortunately, having an existing home to borrow against is not necessarily a viable home buying strategy for many buyers looking to make their home purchase cheaper.

Credit cards

Buyers may also be tempted to consider using credit cards to help fund part or all of their down payment. This is not recommended. Credit cards are best used for small and medium-sized purchases that you can pay back promptly. A large amount like a down payment, even if your credit limit would allow for it, would incur massive amounts of debt in a very short period of time, and this is a very bad idea.

How does getting approved work?

Getting approved for a mortgage with a borrowed down payment will be similar to being approved for any other mortgage. Your lender will need documentation to support your income, savings,employment, debt obligations and credit score in order to determine your creditworthiness. As mentioned previously, you will need to inform them of where your down payment funds have come from if they are borrowed so they can take this debt into account. Finally, you will need to pass the mortgage stress test as well.

To make up for increased debt service, you will need to prove your creditworthiness in other ways. You will firstly need a reliable job that pays you a high enough income to cover your increased debts. Though you can borrow money for your down payment, you can't borrow your monthly payments and will need to keep up with those.

You will also need a high credit score. Lenders already prefer borrowers with high credit scores, so the higher, the better when going for a no-down payment mortgage.

Being in good financial health will also be necessary when it comes to getting your down payment loan in the first place. You should take a careful look at your financial circumstances and consider talking to a mortgage broker before getting a loan to be sure you will be able to get a mortgage.

What's the lowest down payment I can make?

If you are borrowing money for a down payment, you will need to borrow at least 5% of your home’s value, though more expensive homes may require higher down payments. In addition, consider what additional costs you may be required to pay from things like closing costs and mortgage insurance. If you don’t have money for these, you may need to borrow an even larger loan to ensure your home purchase goes through.

Borrowing only part of a down payment

You may also choose to borrow only a portion of your down payment to increase the amount you can put down. This would be useful, for example, if you had less than 20% for a down payment and

were interested in reducing your cost from mortgage default insurance. Depending on how far off you are, borrowing money may cost less than paying the insurance premium. Another example may be to pay more for a better interest rate. Generally, it will be easier to qualify with only part of your down payment borrowed as opposed to attempting a zero-down mortgage.

You may also want to borrow a bit of extra money when buying your home if you find you are falling short of closing costs. In this case, your option would be to borrow the money or break the purchase agreement, making it a clear choice. For purposes like this, some banks offer cash-back mortgages, allowing you to receive extra cash after your mortgage closes.

What are the downsides of a zero-down mortgage?

When you are looking to find a way around the minimum requirements for a mortgage, it is important to understand that these requirements are in place for a reason. This is partly to protect lenders from defaults, with mortgage insurance being the best example. But by protecting from defaults, these limits also protect consumers from financial disaster.

The trouble, then, when you try to circumvent these minimums is putting yourself at increased risk. First, you also pay more interest by borrowing more money. You may feel like you are saving money upfront, but you would pay a lot more down the line. Furthermore, increased debt service will limit your disposable income and make you more susceptible to financial shocks.

At the same time, though you own your home, you will have very little equity due to borrowing such a large amount. This will make it hard to use something like a HELOC until you have made significant payments toward your principal. 

Finally, when you have two loans instead of one, especially with something like a personal loan, you will be affected much more by interest rate increases. If you don't anticipate the possibility of rate increases, you could run into trouble down the line if things increase.

Conclusion

Though many homebuyers aren’t aware of the option, it may be possible to reduce the amount you need to pay with a down payment. However, this will make it harder to get your mortgage approved and will end up costing you more down the line. Though it still presents a viable option for some buyers, you should carefully consider your financial status and speak to a financial advisor or mortgage specialist before you pursue this option.