Every mortgage requires a down payment, it’s an unavoidable fact in Canada. But are there ways to get a no down payment mortgage? And further, is it a good idea to get a mortgage with no down payment?
This article has everything you need to know about no down payment mortgages. Here’s a quick warning though: It’s generally a bad idea to get a no down payment mortgage. If you’re thinking about one, it’s absolutely worth speaking to a licensed mortgage broker first.
Do no down payment mortgages exist?
Sort of. While the Canadian government outlawed zero down payment mortgages in 2008, it’s still possible to get a mortgage without a cash down payment by borrowing the minimum down payment*.
The only approach available today, called Flex Down, requires you to use your credit card, or another line of credit, to borrow your minimum down payment, typically 5% – 10%. As you might imagine, these loans are riskier and more expensive than traditional mortgages.
*Minimum down payments range from 5% to 20% depending on the purchase price.
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Why you might not have a down payment
There are lots of reasons why you might be looking to buy a home but not have a down payment saved. Of course, you could have just not made the effort to save one, but most people in that situation aren’t looking to get a zero down payment mortgage.
The more likely scenario is that you were totally ready to buy a home with a down payment saved, but something happened that depleted your savings in a hurry. A family emergency, a surprise pregnancy, or a global pandemic are all unfortunate but legitimate issues that could leave you looking for a mortgage with no down payment.
Should you get a zero down payment mortgage?
The short answer is no – it’s generally not a good idea to get a mortgage with no down payment. While it’s technically possible to get a zero down payment mortgage, it’s very hard to do – and that’s by design! Here are a few reasons why they can be a bad idea:
Lack of home equity: The first reason to avoid these mortgages is they will leave you in a lot of debt without a home equity buffer. Even a 5% down payment will leave you with a small amount of equity, which gives you some wiggle room if you needed to sell your home in a hurry.
Higher CMCH insurance premiums: A mortgage that uses borrowed money to make the minimum down payment also incurs higher mortgage default insurance premiums. Coverage is compulsory for all mortgages with less than a 20% down payment, but insurers like the CMHC** typically charge an extra .50% for premiums on a zero down payment mortgage.
Additional interest: Another drawback of a zero down payment mortgage is that you’ll have a lot more debt to pay interest on. If you borrow the 5% minimum down payment from a credit card, or another unsecured line of credit, you’ll be charged a high interest rate on that amount. 5% of a typical mortgage, at a typical credit card interest rate of ~20%, could result in thousands of dollars of additional interest each year!
**Due to the ongoing COVID-19 pandemic, the CMHC is not currently issuing mortgage default insurance on mortgages with borrowed down payments. Other mortgage default insurance providers, however, are still doing so.
How to get a no down payment mortgage
Still keen to get a mortgage with zero down payment? Here’s what’s you’ll need.
A Flex Down lender: Not all mortgage providers offer Flex Down mortgages, so you’ll need to find a lender that does. Most mortgage brokers will be able to help you find one.
A very good credit score: You’ll need a much better credit score than the average borrower to be approved for a no down payment mortgage – somewhere north of 680 is ideal.
Excellent credit history: In addition to your credit score, your prospective lender will want to see several years of perfect repayment history. That means no missed payments!
Sufficient and stable income: You will need to prove you have enough income to cover all of your payments, as well as a history of steady income. The longer you’ve been employed full time, the better your chances of getting approved.
Strong debt ratios: Your lender needs to be more than satisfied that you’ll be able to easily service your mortgage payments, as well as your other debts – including those associated with borrowing your down payment. Your debt ratios are used to calculate this.
The bottom line
A no down payment mortgage is not an ideal way to buy a home, and you should avoid them if you can. Taking more time to save a down payment, buying a cheaper home, or continuing to rent are all viable alternatives. There are significant costs and risks associated with zero down payment mortgages that you would do well to avoid.
If you’re still thinking about a no down payment mortgage, then be sure to book a free consultation with a licensed mortgage broker. They’ll be able to give you expert advice on your situation and help you find the best mortgage provider for you if you decide to go ahead.