Even though, by Canadian law, all mortgages must begin with at least a minimum down payment, some lenders will allow you to borrow your down payment as a separate loan transaction. It may sound great, but is it an advisable choice?
As Meridian mortgage expert Michael Healy points out, “When considering a no down payment mortgage, home buyers should take the time to read the fine print and ensure they understand the potential risks and long-term financial implications.”
Here’s a look at the pros and cons (mostly cons) of a no down payment mortgage.
Let’s begin with the basics of down payments
A mortgage down payment is the up-front cash that lenders require to issue your mortgage. In Canada, it’s usually between 5% and 20% of the home purchase price. Most lenders view a down payment as a positive indication that you can afford to buy the home.
Quick calculation: minimum mortgage down payments in Canada
| Purchase price | Minimum down payment |
|---|---|
| $500,000 or less | 5% |
| $500,000 to $1.5M | 5% of the first $500,000, plus 10% of the remainder |
| $1.5M or more | 20% |
Importantly, there are also guidelines around the approved sources of a mortgage down payment. Permitted ones include:
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Savings
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Investments
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Gifts from immediate family
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Government programs such as the Home Buyers' Plan and the First Home Savings Account, which let you withdraw up to $60,000 from your RRSP, tax-free, for a down payment
This means that you typically can’t obtain your down payment using a credit card or a line of credit from a bank.
So, are cash down payments absolutely necessary?
In Canada, you’re legally required to make a down payment for a mortgage but, as mentioned, there’s one high-risk way to circumvent this legality: borrow the down payment. This method is often called “flex down,” and it results in an additional loan payment separate from your mortgage. Even if you borrow your down payment this way, the lender will still assess your ability to handle the mortgage payments plus the additional debt from the down payment loan.
“Most lenders in Canada will not accept a borrowed down payment,” adds Mike Healy, “and you would often need to seek out an alternative lender which would lead to an increased interest rate. The borrowed down payment is also added to your debt load, which would restrict the total amount that you would be able to borrow.”
With a flex down approach, there’s also lots of financial risk involved because:
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You’ll have no home equity cushion (more on that below)
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You’ll be subject to high mortgage insurance payments
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You’ll take on a far larger debt
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You'll likely face a higher interest rate to offset the risk associated with the mortgage
Flex down mortgages in Canada are also subject to a lengthy list of restrictions in areas such as property type, property value, interest rate, and amortization period. For a full exploration of these restrictions, visit Mortgages.ca.
Why some buyers are willing to risk it
Although home buyers considering a no down payment mortgage are wise to proceed with caution, some are willing to take a calculated risk in a favorable market.
“These buyers are typically relying on future market appreciation to build equity,” explains Healy, ”hoping that rising home values will allow them to refinance or access equity down the line.”
For example, if you purchase a home for $500,000 in 2025 with no money down and the market increases by 20% over three years, your home could be worth $600,000. In that case, refinancing at 80% loan-to-value would allow you to access $480,000, effectively creating equity without having contributed a down payment. However, this strategy carries significant risks.
“If the market declines by 20% instead, your home would be worth only $400,000, leaving you with negative equity and limited refinancing options,” adds Healy.
Why is home equity such a big deal?
Home equity is an important factor in reducing financial risk because it’s essentially the amount of the purchased home that you currently “own” by having made a down payment plus any monthly payments.
If you made a down payment of $50,000 and have made another $50,000 in monthly payments, you’d have $100,000 in home equity – although, a good percentage of the second $50,000 would go toward interest payments, so realistically you’d have about $80,000 in equity. That equity could become critical should you choose or need to sell the property. So, at the very beginning of a mortgage, your down payment is really your foundation for home equity.
Your mortgage insurance cost is tied directly to your down payment
In Canada, if your down payment is less than 20% of the purchase price, you’ll be required to pay to mortgage default insurance issued by a provider such as Canada Mortgage and Housing Corporation (CMHC), SAGEN, or Canada Guaranty. These insurance premiums are usually much higher if you choose the flex down route for your down payment, as high as 4.5% of your mortgage.
Also, remember that when your borrow your down payment on a home purchase, your mortgage principal is larger and, therefore, so are your interest payments. Over a decades-long mortgage, this difference can really inflate your cost of borrowing.
For example, if you put $100,000 down on a $500,000 purchase (20% of the price) and paid 3% interest in a 30-year mortgage, you’ll ultimately pay about $758,000 over the life of the loan and won’t need default mortgage insurance. In the same scenario with no down payment, you’ll pay more than $900,000 – plus the cost of mortgage default insurance.
Final analysis: a traditional down payment is the wise choice
As we’ve seen, for a mortgage in Canada, the down payment usually makes all the difference in determining the size of your mortgage and the overall cost of purchasing a home. The bigger the down payment, the better position you’re in to eventually own your home with lower payments and a lower cost of borrowing.
Ready to talk mortgages?
For more on the mortgage process and how to prepare for the best outcome, make an appointment with a Meridian Mortgage specialist.
