Borrowing for Your Down Payment

Should You Borrow for Your Down Payment?

One of the most difficult aspects when it comes to applying for a secured mortgage loan is trying to save for a down payment. It is also hard to know exactly how much is the preferred amount to put down. Many Ontario homeowners are reluctant to approach a bank for mortgage financing unless they have a substantial down payment. Equally large numbers of Ontario borrowers are struggling to find ways to save for a sufficient down payment while having to pay for all the other monthly expenses they may be facing.

To further compound things, it is becoming increasingly more difficult to contemplate buying an Ontario property. Ontario is witnessing historically high average home prices and a shortage of housing inventory with multiple bidding wars not uncommon on the limited inventory of properties on the market. In Ontario, the average price for a single-dwelling property has risen by 26.7% from January 2020 and is now at $796,884. 

Although the cost of a house in Ontario, especially in large urban centers such as the GTA and central Toronto may be discouraging, it is possible to borrow money to boost your down payment. 

Choices for borrowing to help increase money towards a down payment can include:

  • Borrow against the equity in another property 
  • Borrow from family and friends,
  • Borrow from a retirement fund,
  • Private short-term loan if credit or salary may be an issue,
  • Personal loan (only applicable with substantial proven salary and exemplary credit), 
  • Line of credit (only from a financial institution other than where you are applying for a mortgage),
  • Credit cards

The Upsides of Borrowing Money to Make a Down Payment on a Home

Like any financial decision big or small, there remains pro and cons to borrowing for a down payment. The ultimate decision of whether you choose to borrow to bolster down payment funds resides on your overall comfort level, your risk tolerance, and your unique financial circumstances.

  • The funds will enable homeownership sooner- Rather than put money towards rent, borrowing funds to buy a property will enable you to build equity faster than waiting to save the funds.
  • Prevents the need for default insurance– If you borrow funds equal to 20% of the cost of the property you will not be asked to pay Canadian Housing and Mortgage Corporation (CHMC) default insurance. Although insurance is rolled into the monthly mortgage payment, it still does represent an added monthly expense by increasing the overall monthly payment.
  • Build wealth by investing in property– By borrowing funds to reach a sizeable down payment you can buy a property that will add to your overall net wealth. Property is appreciating in Canada which makes for a great overall investment.
  • The cost of borrowing is at historically low levels- By taking advantage of extremely low-interest rates on different loans you can put this money towards a mortgage which will lower the overall cost of the mortgage while making payments on the loan you take out to cover the down payment manageable with such low-interest rates attached.

The Downsides of Borrowing Money to Make a Down Payment on a Home 

Nothing comes without risk. There can be disadvantages to borrowing for a down payment. Again, the decision comes down to opportunity cost- Does the risk outweigh the gain?

  • Using equity as a way to borrow can pose a risk– If you choose to take out a home equity loan or Home Equity Line of Credit (HELOC) through a bank or private lender then you are using some of the equity built in the property you are leveraging your loan against. This equity will take time to rebuild.
  • Taking out a loan to cover down payment will lower your debt service ratio– Lenders will be assessing the amount of debt you have about your income and ability to pay. By taking out additional debt, your overall debt ratio will be impacted slightly.
  • You will have to pay back this debt despite low-interest rates- Although interest rates remain extremely low currently, taking out another debt whether it be through a bank, credit union or private lender still represent a monthly payment that must be met
  • There are costs when taking out a loan- Although the cost may be low currently, you must factor in the total cost of borrowing. If borrowing through private lender interest rates will range between 7% to 12% and fees will range typically between 3% to 6% of the total cost of the loan. Banks will have fees attached as well to consider if borrowing through an A lender.

Alternatives to Borrowing for a Down Payment 

  • Saving the old-fashioned way– Before credit cards, there were very few alternatives to purchasing anything, big or small. If the cash was not available, then there had to be a way to save the money to pay for it. The same principle can apply to saving for a down payment. Saving the old-fashioned way by cutting variable expenses, reducing unnecessary spending, and setting up a separate fund that a portion of your paycheck will be automatically transferred to monthly can lead to a healthy down payment saving.
  • Government programs are available to help– If you are still finding it difficult to come up with the funds by diligently saving, The First Time HomeBuyers Program launched in 2019 by the Federal Government provides the opportunity for first-time homebuyers to have their savings matched. The Government funds do not have to be paid back until the end of the term of the mortgage loan and will take the form of the equity built in the property. The program is sometimes referred to as a Shared Equity Program. You will be sharing equity with the Government in direct relation to the money that was initially put in.
  • Take advantage of RRSP increased contribution room- Recently the amount of money that first-time homebuyers could take out of their RRSP without tax penalty towards a down payment increased from $25,000 to $35,000. For a couple who are both first-time home buyers, the combined amount is $70,000.
  • Buy a less expensive property– Consider adjusting your budget. If you are unable to save and borrowing is not a viable option, look at properties that are within budget. Less house equals less expense.

 Mortgage Broker Store Can Help Negotiate Loan Options If you are looking at different loan options to put towards a down payment or other financial short-term solutions, Mortgage Broker Store can help narrow down applicable options. With access to a network of well-experienced and established private lenders throughout Ontario, we can set you up with a suitable lender to meet your mortgage needs. Don’t hesitate to contact us at your convenience to help with any concerns you may have if you are looking to purchase a new property or need financing to reach equally important financial goals.

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.