Saving for a mortgage down payment can be a long and tedious process. According to the Canadian Real Estate Association, the average price of a Canadian home was $540,000 in February, a 15.2% increase compared to a year earlier. You would need to save $108,000 just to make a standard 20% down payment. Faced with rising home prices, some Canadians choose to borrow money for their down payment.
How to Borrow Money for a Down Payment?
Borrowing money for a down payment is certainly possible, though you’ll have to put up some of the money yourself. Lenders require a minimum of 5% of the purchase price up to $500,000 and 10% over $500,000. You may be able to use other loans to help with your down payment, but only after the lender’s minimum requirements are satisfied. For example, if you’re buying a $500,000 home and have $25,000 in savings, you could use a personal loan to cover the rest of the down payment.
Advantages of Borrowing for a Down Payment
With interest rates at historic lows, borrowing for a portion of your down payment might make sense in the right circumstances.
Save on Mortgage Default Insurance
If you buy a house with less than a 20% down payment, you will need to pay for mortgage default insurance, which pays the lender if you can’t make your mortgage payments. The premiums for this insurance ranges from 0.60% all the way up to 4%. That’s a hefty fee.
The more money you put down, the lower the insurance rates. If your overall cost to borrow money for a down payment is less than the default-insurance fee, borrowing can be an attractive option.
Build Equity and Stop Paying Rent
When you make mortgage payments, you’re investing in your future. On the other hand, rent cheques are only an expense, draining money from your bank account. By getting into the housing market more quickly, you’ll be able to grow your home equity as soon as possible. This is particularly true in competitive housing markets where house prices are rising rapidly.
Disadvantages of Borrowing Money for Your Down Payment
While getting into the housing market might be enticing, be sure to consider the risks of borrowing for your down payment.
More Debt Means More Risk
In the event of an economic downturn or layoffs, having more debt can increase your chances of defaulting on your debt. If home prices start falling as well, you may end up owing much more than your house is worth.
Interest Rates Can Add Up
Interest rates on loans to make a down payment are often higher than the rate for your standard mortgage. Paying multiple loans at once can take up a significant amount of your paycheque, and taking out too much debt could end up costing you much more in the long run.
Not to mention, it could tip your debt-to-income ratios such that you could potentially have trouble qualifying for a mortgage.
Finding the Right Mortgage for You
If you’re not sure whether borrowing money for a down payment makes sense, you can make some other considerations, like looking for a less expensive home, waiting until you’ve saved up more money, or borrow from your own Registered Retirement Savings Plan using the Home Buyers’ Plan.
If you’re ready to start looking for a home today, compare to find the best mortgage rates to get an idea of what’s available.