Should You Borrow for Your Down Payment?

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With property prices climbing faster than median incomes, saving for a down payment is one of the largest hurdles standing in the way of most Canadians and homeownership. The idea of borrowing money to cover a lump-sum down payment can be tempting, with some borrowers considering personal loans or lines of credit to put together enough to purchase a home. 

However, the real question is whether you can use borrowed funds for a down payment and, if so, whether it makes financial sense. This guide breaks down borrowing for your down payment, what lenders allow, and how it can impact your mortgage application.

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Key Takeaways

• Borrowed down payments are permitted, but they come with higher default insurance premiums.
• The monthly repayment on borrowed funds is included in your total debt service ratio, directly reducing the maximum mortgage you qualify for.
• Alternative options include using gifted funds, an FHSA and the RRSP Home Buyers’ Plan to avoid adding additional debt to your qualification ratios.

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Can You Borrow Money for Your Down Payment in Canada?

Borrowing money for your down payment is generally permitted, but whether it is allowed depends on the default insurance provider backing the mortgage and the lender originating it. A borrowed down payment is considered a non-traditional down payment source and refers to any portion of your down payment that comes from a source you must repay. That includes unsecured personal loans, unsecured lines of credit, and credit card advances.

Funds Borrowed Against Existing Assets

Funds borrowed against proven assets you already own, such as a home equity line of credit (HELOC) secured by existing property, are generally classified as traditional down payment sources. Traditional down payment sources also include personal savings, non-repayable gifts from immediate family members and proceeds from the sale of a property. A HELOC or secured loan is treated differently from unsecured borrowing because it represents a return of equity you have already built rather than new unsecured debt.

The monthly repayment on the HELOC or secured loan still factors into your debt service ratios, so it will reduce your maximum qualifying amount. Lenders also typically calculate a monthly payment of 3% of the outstanding HELOC balance, even if your actual minimum payment is interest-only. However, if the balance owing, or expected to be owed if you plan on using it for your down payment, exceeds $50,000, then the carrying cost is considered towards your total debt servicing and amortized by 25 years on the federal benchmark rate, currently 5.25% 

Mortgage Default Insurers

Canada’s default insurers have programs that accommodate borrowed funds under specific conditions, each with different requirements around credit strength, loan-to-value limits, and premium pricing. Borrowers do not choose their insurer directly. The lender makes that selection based on internal policies and insurer relationships, which is why some lenders will allow borrowed down payments, and others will not. 

Sagen

Sagen has a dedicated Borrowed Down Payment Program that allows borrowers to start building equity without years of saving. The program accepts non-traditional down payment sources, including borrowed funds from arm’s-length sources such as personal loans, lines of credit, or credit cards, as well as gifts from individuals unrelated to the borrower by familial or legal relationship. Mortgage default insurance premiums under this program are 4.50% of the mortgage amount for amortizations of 25 years or less and 4.70% for amortizations up to 30 years. 

Canada Guaranty

Canada Guaranty offers the Flex 95 Advantage program, which provides flexible down payment options for borrowers with a strong credit history. Accepted down payment sources include borrowed funds from arm’s-length sources, including personal loans, lines of credit, or lender credit. As well, the program allows gifts from individuals who are not close family members or grants from any party that is arm’s length to the transaction. Mortgage default insurance premiums under this program are 4.50% of the mortgage amount for amortizations of 25 years or less and 4.70% for amortizations up to 30 years.

How Borrowed Funds Affect Your Qualification

Beyond paying a higher mortgage default insurance premium, the larger impact could be on your ability to qualify for a mortgage. Every additional dollar of borrowed down payment creates a monthly debt obligation that impacts your debt service ratios. For insured mortgages, your gross debt service ratio cannot exceed 39%, and your total debt service ratio cannot exceed 44%. 

The monthly payment on a personal loan or line of credit used for the down payment is included in your TDS calculation, which directly reduces the amount you can borrow. The stress test rules ensure you qualify at the higher of 5.25% or your contract rate plus 2%, which already limits purchasing power before any other debt enters the equation. A mortgage affordability calculator can help you determine the exact reduction in purchasing power for your specific income and debt situation.

Should You Use Borrowed Funds for a Down Payment?

Borrowing for a down payment is not inherently a bad financial decision, but it does carry risks and trade-offs that can compound quickly. The added monthly repayment on the borrowed amount reduces the mortgage amount you qualify for. Depending on your debt service ratios, this could mean you need to reassess your purchase price, increase your down payment, or abandon your purchase plans altogether. 

If you are using one of the default insurer programs specifically for borrowed down payments, the default insurance premium is higher than the premium you would pay with a traditional down payment source, due to the added risk of payment default. Additionally, your total borrowing cost increases because you are paying interest on both your mortgage balance and the borrowed funds, as well as a higher default insurance premium if added to your mortgage balance.

There are scenarios where using borrowed funds can make sense. Someone with minimal existing debt and a high credit score may find that the premium surcharge is an acceptable cost of entering the housing market sooner. Using borrowed funds could be particularly useful in cities where monthly rent payments rival or exceed a mortgage payment. In that situation, the opportunity cost of spending another two or three years saving while property values and rents continue to rise could outweigh the added borrowing cost.

Debt-Free Alternative Down Payment Options 

Several programs exist specifically to help Canadians build a down payment without taking on additional debt that reduces their qualification room.

First Home Savings Account (FHSA)

The FHSA allows first-time home buyers to contribute up to $8,000 per year, for a lifetime maximum of $40,000, toward a down payment. Contributions to the FHSA can be deducted from taxable income, and withdrawals for a qualifying first home purchase are completely tax-free. It is the most generous tax-efficient down payment savings vehicle available to eligible Canadians, combining the tax deduction of an RRSP with the tax-free growth and withdrawal of a TFSA.

RRSP Home Buyers’ Plan (HBP)

The Home Buyers’ Plan acts like a tax-free loan, allowing first-time buyers to withdraw up to $60,000 per person from their RRSP savings to use toward a down payment. Withdrawals must be repaid to the RRSP over 15 years, starting in the second year after the withdrawal, for the funds to remain tax-free. Otherwise, any amount withdrawn and not repaid will be added to your taxable income for the year and taxed based on your marginal tax bracket. 

Gifted Down Payments

Gifts from immediate family members (limited to next of kin) remain among the most common sources of down payments, other than personal savings. To use a gifted down payment, you will need additional documentation for the lender, including a signed gift letter confirming the donor and recipient names, the relationship, the gift amount, the gift date, and that no repayment is required. 

Government Grants and Incentives

Depending on your province, you may qualify for first-time home buyer grants or incentives that reduce your upfront costs. Several provinces and municipalities offer partial or full refunds of land transfer taxes for first-time buyers. Some municipalities also have dedicated affordability programs that provide down payment assistance through forgivable loans or direct grants. 

Federally, first-time buyers can claim an income tax credit on qualifying homes under the Home Buyers’ Amount. If you are purchasing a new build, you may also be eligible for a rebate on the GST or HST.

How Lenders Verify Your Down Payment Source

During the underwriting process, lenders typically request 90 days of bank statements showing the accumulation of your down payment. They look for large, unexplained deposits that could indicate undisclosed borrowed funds. If a lump sum appears that does not match your regular income pattern, the lender will request additional documentation and an explanation to verify its source. 

When borrowing funds is permitted, lenders require specific documentation that varies by the source you are using. Trying to disguise a loan as savings constitutes mortgage fraud under Canadian law. If you are using a borrowed down payment, declare it. Lenders who work with Sagen or Canada Guaranty’s borrowed down payment programs can match you with an eligible mortgage solution.

Frequently Asked Questions (FAQ) About Borrowed Down Payments

Final Thoughts

Borrowing for a down payment may come with higher insurance premiums, reduced qualification room, and additional monthly debt obligations that need to be weighed against the cost of waiting to save up enough for a down payment. For most buyers, maximizing savings in an FHSA or RRSP and taking advantage of federal and provincial programs and incentives will make more financial sense than taking on additional debt. A licensed mortgage expert can show you exactly how a borrowed versus a saved down payment changes your purchasing power and total cost of borrowing so that you can make the best decision for your situation.

Ready to see how different down payment scenarios affect your mortgage options? Contact nesto mortgage experts for a personalized mortgage strategy built around your financial goals.

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