What If I don’t Have a Down Payment?

One of the costliest lump sums you may ever have to pay is a down payment on a house.

The general rule of thumb is that your down payment should be at least 20% of the value of the house. On a $200,000 home, your down payment would be $40,000. Looking at these numbers you may ask yourself, “What if I don’t have a down payment?”

Most Canadians don’t have a spare $40,000 in their bank account. And home prices any higher than that can seem virtually impossible. But, there are ways to procure funds for a down payment that don’t involve saving every dollar you earn and eating rice for breakfast, lunch, and dinner every day.

The Twenty Percent Myth

A 20% down payment is a rule of thumb, but it’s not mandatory. Down payments can be as low as 5% of the total value of the home. A $10,000 down payment on a $200,000 home certainly sounds a lot more manageable. You may realize that you do in fact have enough for a down payment.

Just keep in mind that a 5% down payment necessitates what is known as a “high ratio loan". This is when lenders provide you with between 80% and 95% of the value of the home. These loans typically come with higher interest rates and have to be insured against default by something like the Canada Mortgage and Housing Corporation (CMHC). Other alternatives to down payments also exist.

Other Credit Sources

There are plenty of other credit sources you could feasibly use to get your down payment. These include:

  • A line of credit
  • Personal loan
  • Credit card

Of course, all of these come with their own set of risks. The riskiest of the three is a credit card. Many lenders won’t even allow you to put a down payment on a credit card unless they can verify that you’re capable of repaying the debt. Loans and lines of credit also come with the caveat that you have to pay them back.

If you think you can manage it, then it is a possibility. You don’t technically have to have the money stored away in order to get the money for a down payment. But, you will end up paying a decent amount in the long run. So, if you’re asking yourself, “What if I don’t have enough for a down payment?” then just be mindful of the risks of this option.

The RRSP HBP

One of the most common options for receiving a government loan is the Registered Retirement Savings Plan (RRSP) Home Buyer’s Plan (HBP). The HBP is offered by the Canadian government and allows you to borrow as much as $25,000 from your RRSP. This is an unusual loan for a few reasons:

  • ​Repayment begins after the second year.
  • You are essentially borrowing from yourself.
  • You must repay the loan in 15 annual payments.

Again, this option comes with a distinct set of risks. On the bright side, you can get up to $50,000 for a down payment if you and a partner who is also purchasing the home both apply for the HBP. On the downside, there’s not a lot of wiggle room when it comes to repayment. Plus, late payments or underpayments will be taxed as income in that year.

Being financially responsible and budgeting accordingly are both keys to making this type of down payment loan work. This may be the answer to the “How do I get a down payment loan?” question.

Government Programs

Yes, the RRSP HBP is a government program, but many of Canada’s provinces and municipalities also offer programs of their own. This, of course, depends on where you live in the country. A down payment program in Edmonton might be infinitely better than one in Calgary.

That being said, down payment assistance programs are generally reserved for people with low to moderate incomes. But, it wouldn’t hurt to research these programs and see if you qualify.As you can see, there are plenty of alternatives to down payments (or, at least, conventional down payments).

All of these options come with some inherent risk, but they allow you to bypass the option of spending years saving up money. All in all, though, the soundest way to start the home buying process is with a down payment you actually saved up for.

What you should do now

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