#GoodReads – Zero-down mortgages in Canada

#GoodReads – “Can you get a zero-down mortgage in Canada?” via Canadian Real Estate Magazine.

“…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

Personal loans

Personal lines of credit

Borrowing from home equity

Credit cards

…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.”

To read the full article, click here.