For potential homeowners, coming up with a sizable down payment is probably the hardest part of purchasing a home. A down payment is a necessary aspect of securing a mortgage. It is a way for creditors to reduce the risk of lending you money. Gone were the days when Canadians were able to purchase homes with 100% financing and zero down payment. Today, you have to pay at least 5% of the purchase price when applying for a mortgage.
With the rising prices of real estate nowadays, saving up for a down payment is proving to be a challenge for many. Borrowing funds has become a growing trend as more Canadians look for ways to finance the money needed to kick-start the process of owning a home. Every year, the country records around $10 billion in loans for home down payments. If you are purchasing a home but struggling monetarily, borrow down payment Canada may be your only option.
Can You Borrow A Down Payment In Canada?
In Canada, you are allowed to borrow money to make a down payment, as long as you can prove that a portion of that down payment came from your own resources. Lenders typically require a minimum amount – 5% of the home purchase price for up to $500,000 and 10% for over $500,000. On average, a Canadian home is valued at $528,000. Even with a 5% down payment, you will need $27,800 to cover the cost, mortgage default insurance not included.
Mortgage default insurance is required by the Canadian government when home buyers are paying less than 20% down on a purchase. It protects your lender in case you ever stopped paying your home loan. The insurance can be rolled into your mortgage and must be paid throughout the life of the debt. If you have funds available and can afford to pay a 20% down payment, do so just to avoid paying mortgage default insurance.
There are advantages when you choose to borrow down payment in Canada. Under the right circumstances, you can save thousands of dollars. Borrowing allows you to get into the market and choose the home you want more quickly than when you take time-saving up. The sooner you own a home, the sooner you can stop wasting money on rent. Finally, with how the home prices are rapidly increasing, owning one can help increase your net worth.
Options For Borrowing A Down Payment In Canada
When borrowing money for your down payment, you must understand that it will increase your debt-to-income ratio. Borrowers with low ratios are generally preferred by lenders since they are less likely to default on their loans. Meanwhile, those dealing with additional debt tends to be easily overwhelmed with payments. If you are planning to borrow money to make a down payment, make sure to not overload your debt pile to avoid encountering such problems.
There are several options if you want to borrow down payment Canada and win that mortgage. You just have to choose which one works best for you. You may consider using a line of credit for down payment or taking out a personal loan. Another source for borrowing down payments is your credit card. Your federal government can also help you since they offer down payment assistance for potential home-buyers.
Line of Credit
Using a line of credit for down payment Canada is a common option for borrowers who are unable to save up enough money for a home loan. A line of credit is a unique loan product that is unlike your typical loan. It works somewhat like a credit card. With a credit line, you can withdraw funds up until your assigned limit. You only have to pay interest on the portion you used. Once that money is paid back, you can borrow again and again.
Your line of credit cannot come from the same financial institution where you obtain your mortgage Canada. Can I buy a house with a line of credit? Yes, you can. Compared to mortgages, lines of credit have more simple interest calculations, which make them easier to pay down over time. When you borrow against your line of credit, be careful of over-leveraging. Talk with your mortgage broker about the danger of borrowing too much money.
Aside from using a line of credit for a down payment, you can also use a personal loan. This option, however, is usually reserved for borrowers with a very good credit score and a healthy financial history. You will also need to have a high income and a reasonable debt load to qualify. Lenders will want to guarantee that you are capable of handling additional debt on top of the mortgage you are planning to take out to purchase a home.
Unsecured debts like personal loans can be risky, more so with debtors with bad financial standing. No collateral means lenders will be left with a bad deal in the event the borrower defaults on their loans. The strict requirements will ensure that only those who are capable of paying what they owe responsibly can avail. Private mortgage lenders tend to be easier and more flexible to work with than traditional institutions in this regard.
Your credit card can also be useful when you need to borrow money for a down payment. Out of all the sources, however, it is the riskiest as it is the most expensive type of debt to have. In Canada, credit card debt is a major problem. An increasing number of consumers in the country are dealing with mounting credit card debt. Currently, the average amount of credit card debt in Canada sits at $2,627.
Debtors are advised not to borrow against a credit card for a down payment due to the staggering interest they need to pay after. Consumers are usually paying around 20% or more in interest on the money they used against credit cards. Considering the kind of money you will need to borrow for your down payment, you will soon find yourself swimming in debt the moment you tap on your card.
If taking out a personal loan or using a line of credit for down payment Canada is not an option, you may ask the federal government for assistance. This comes in the form of Home Buyers’ Plan. In the program, Canadians are allowed to borrow as much as $25,000 from their registered retirement savings plans (RRSPs) and use the money as a down payment on their home purchase. For couples, they can get as much as $50,000.
In this option, borrowers have 15 years to repay their RRSP funds before being taxed on it. Funds are totally non-taxable if you have paid back all the money you owe before the 15-year period ends. To qualify, you need to be a first-time homebuyer and a Canadian citizen. You will also have to sign a purchase agreement on a qualifying home. Note that before borrowing, you need to keep the RRSP funds being used on deposit for a minimum of 90 days.
When all else fails, you may want to borrow money from a family member. These funds must be considered a “gift” rather than a loan and that no repayment is expected. This trend is becoming increasingly common for young couples buying their home for the first time. They turn to their family, usually a parent, who is able and willing to help them come up with down payment money.
In Canada, it has become common for young adults coming from university to be saddled with student loans. These can take years to pay off, hindering them from taking other financial obligations. Student loans are one of the biggest hurdles of owning a home for young adults. It is difficult to be approved for credit when you already have an existing large debt dragging you down.
Lenders allow borrowers to take these funds as a gift. To make this a valid financial transaction, both the “gifter” and the borrower will need to sign a one-page “gift letter.” The content must stipulate that the money is not a loan and that repayment is not necessary. Some lenders may also require paperwork showing the money being transferred from your family member’s account to yours.
Saving up for a down payment without the need to borrow funds is the ideal way of buying a home, but this is not always achievable for many. Coming up with a large sum of money for a down payment can be a real struggle, especially with all the other expenses and debts you have to settle. You can always borrow funds when you need a down payment for your home purchase, but you need to consider the pros and cons of the different options.
If you are confident that you can afford the additional monthly payments and stay prepared for any unexpected expenditures, borrowing money for a down payment may be the best option for you. Speak with your financial advisor or mortgage specialist and discuss the right route to take for your particular situation. They can find you the most advantageous deals and provide expert advice on home loans and down payments.
Frequently Asked Questions
How do you borrow money for a down payment?
You have several options if you want to borrow money for a down payment. You may use a line of credit or take out a personal loan. The Canadian government also offers help to first-time homebuyers through the Home Buyers’ Plan.
Can you get a loan for a down payment?
Yes. You have to decide which type of loan suits your needs. A line of credit allows borrowers to withdraw funds again and again, as long as they pay back what they owe every time. If you choose a personal loan, you will need a high credit score to qualify with major banks.
Where can I borrow money for a down payment?
You may ask your lender about using a line of credit or a personal loan for a down payment. Lenders also allow “gifts” from family members, but your “gift letter” must stipulate that the money is not a loan and no repayment is required.
Should you borrow for your down payment?
If you are unable to save enough money for a down payment, your best option is to borrow funds. There are a lot of options available for potential homeowners in Canada. Make sure that you choose the best deals that fit your financial needs.