Many young Canadians dream of purchasing their first house. However, in many cities such as Toronto, the real estate market is rising rapidly. Even when you save up for several years, it may not be enough to make a down payment. Before you give up, we have an option that can help. We are currently living in an unpredictable world where the financial situation can suddenly change. Luckily even when this happens, you can buy a new property with no down payment.
How much is the down payment for a property?
In Canada, all down payments are calculated based on the purchase price of the house. Depending on that value, the down payment percentage has three tiers. Here is a breakdown:
- Purchasing price equal to or below $500,000 = 5% down payment
- Purchase price more than $500,000 and less than $1 million = 5% of the first $500,000 + 10% of the remaining balance
- Purchasing price equal to or above $1 million = 20% down payment
As you can see, these values are almost impossible to save for young Canadians. That’s why many Millennials prefer renting an apartment.
Can you buy a house without a down payment?
Many people wonder if there truly is a no-money-down mortgage in Canada. Yes, there is. Instead of using all the money you have saved up, you can borrow the down payment. This option is best for buyers with stable finances since you will be acquiring more debt. Today, the most popular choice is called Flex Down and to get it, you will need your credit card or a line of credit.
Requirements to get a no-money-down mortgage in Canada
If you believe that a mortgage with no down payment is a good option for you, remember that the lender cannot have any ties to your property. It means you can’t borrow the down payment money from the same lender offering you the mortgage. Also, you will have to meet the following requirements.
Excellent credit score
A good credit score is a requirement by most banks for approving a mortgage. But when it comes to borrowing your down payment, the minimum credit score you may need is 650. Your credit score should be 680 or over to increase your chances of approval. Additionally, your credit history should not reflect any missed payments.
Since you will be acquiring a substantial debt, the bank needs to ensure you can afford the monthly payments. To prove this, you will need a stable job with a regular income. Further, it will help if you have been a full-time employee for a long time.
Enough money for closing fees
When it comes to a no-money-down mortgage in Canada, you can only borrow a determined amount. You will still have to pay the closing fees, which will be between one and two percent of the purchase price.
An acceptable debt ratio
As a first-time homeowner, you need to become familiar with the term debt ratio. It is the division of your debt over assets. A high ratio indicates a high financial risk. To get approved for a no-down-payment mortgage, your debt ratio needs to be on the lower end.
Finding the right lender
Not all lenders can give you access to a no-down-payment mortgage. That’s why you need to ask your broker to help you find one.
Pros and cons of getting a no-down-payment mortgage
If you decide to borrow the money for your down payment, it will directly impact your finances. However, this would be a good option if you meet all the requirements. Here are some pros and cons of a no-down-payment mortgage.
If you borrow the money and purchase a new property, you will be investing your money in a future asset. You will start building equity instead of spending your money on a property that you don’t own.
If you don’t pay a minimum down-payment of 20 percent, you will have to purchase insurance. It is an unavoidable extra cost. But, if you borrow the whole amount, you can save thousands of dollars.
Increase your wealth
One of the best things about purchasing a property is that you will accumulate more net worth. In this regard, a house will be your most expensive asset. We understand you will have several bills to pay every month. But, you are also building a high amount of equity.
Acquiring more debt
One of the main disadvantages of borrowing your down payment is an increase in your debt ratio. However, this depends on your situation. For instance, if that is your only loan, it won’t create a high impact. Otherwise, chances are all the bills may become overwhelming.
You may be charged a high interest rate on your down-payment loan because of your debt ratio.
No home equity
As you are not using your own money for the purchase, you won’t own any home equity in the beginning.
Fill out our online form and, one of our mortgage experts will provide you options with your best interest in mind.