Can I Borrow A Down Payment?

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July 21, 2020

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With the easy availability of credit these days, it’s rare to have to save up a significant amount of money to make a purchase. For most, the one exception to this rule is the down payment on a home. Canadian mortgage rules require you to have at least 5 percent of the cost of the home for your down payment, which means that most people will need to come up with at least $10,000 – and often more – to buy the home of their dreams.

However, the typical recommendation is to have 20 percent for the down payment. This practically ensures that you’ll qualify for the home you want and you won’t have to pay for mortgage insurance.

Naturally, this is a lot of money to save up. The good news is that there are ways to borrow money for that down payment. You just need to decide if this is the right option for you.

How Borrowing the Down Payment Affects Your Mortgage

No matter how you borrow money for your down payment, it’s going to increase your debt load. You’ll have to make a monthly payment on this loan as well as making your mortgage payment. This decreases the amount of money that you can borrow for your home. 

When a bank decides how much money they can lend you, they make that decision based on how much debt you pay each month. Each lender uses a different formula, but a general rule of thumb is that they’ll want your total monthly debt payments – including your mortgage payment – to be less than 30 or 40 percent of your monthly income. Lenders will decrease the amount they’ll allow you to borrow by the amount you have to pay back for your loan.

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For example, a personal bank loan may be a solution as a source of down payment funds, but only if your credit score and financial history are healthy. It’s best to talk to a mortgage professional to get an affirmative answer, as banks will analyze your financial situation to ensure that you are financially capable of handling additional debt load, especially if you’re planning to take out a mortgage for a home purchase, on top of the personal loan. But, ultimately, this will affect the mortgage amount you would be allowed to borrow. 

For instance, let’s say that if you had the full down payment, the bank would allow you a mortgage that had a $2,000 monthly payment. If you need to borrow the down payment, though, and the payment on that down payment loan is $200 each month, the bank will then only approve you for a mortgage that has a $1,800 monthly payment.

Home Equity Loans and Lines of Credit

If you currently own a home and are thinking about either upgrading or downsizing, using a home equity loan or a line of credit may be a lot easier than trying to save up a separate down payment. This would be an excellent option for anyone who’s looking to purchase a brand-new home because it takes several months for the home to be built. Taking a loan from your equity is an easy process, and it will allow you to continue to live in your current house while you wait for possession day.

When you take this route, you’ll have to make monthly payments on the loan until you pay it off. However, most people simply pay the full amount of the loan off after they sell their home. This means that you won’t have the additional loan payments once you move into your new home.

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Unsecured Credit Sources

Some people consider taking out an unsecured loan. Examples of this would be getting a personal loan from the bank or getting a cash advance through your credit card. Typically, you need to have a very high credit score to qualify for this type of loan, and these loans often come with high-interest rates. In the case of applying for a personal loan, the lender may even ask how you plan to spend the money, and you may be denied if they find out you’re going to use it as a down payment on a home.

Most of the time, taking out an unsecured loan to pay for your down payment is a bad idea. However, this could be an option if you’re expecting a windfall payment such as an annual bonus in a few months but want to take advantage of a great deal on a new home now. With the extra risks, though, it might be smarter to wait.

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Borrowing From Your RRSP

First-time home buyers can’t tap into equity the way that current homeowners can, but there’s a great option through Canada’s Home Buyers’ Plan. Through this program, the government allows you to borrow up to $35,000 from your registered retirement savings plan (RRSP). Married couples would then have access to up to $70,000 if each partner borrows the maximum amount.

What’s especially nice about this plan is that you don’t have to start making payments on the loan until the second year after you borrow the money. And as long as you pay the money back within 15 years, it’s tax-free. However, you’re always free to pay it back sooner than the requirements state, and if you’re able to do so, that’s the best move.

Saving up for a down payment little by little can be frustrating. Without a down payment, you can get frustrated watching great deals go by and knowing that you’re not building up equity every time you make that rent payment. Borrowing the down payment is an excellent option for some buyers, but it’s important to carefully think through all of the advantages and disadvantages before you make a decision.

Click here to get this simple first-time home buyer's guide!

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