Buying a home is an exciting project, but the decision requires serious financial preparation. Being denied financing or having an insufficient down payment does not necessarily mean you must abandon your project. Depending on your circumstances, certain solutions may help you improve your application, save more or postpone buying until conditions are more favourable. Before choosing a property or financing option, take the time to assess your means, future responsibilities and life goals.
Are you ready to buy a home?
The ability to obtain a mortgage is only one part of the decision. You must also determine whether buying a property truly suits your current circumstances.
Do you have a sufficient down payment?
The down payment is the amount paid at the time of purchase. The minimum amount depends in part on the property’s price.
In Canada, the minimum down payment for a property priced at $500,000 or less is generally 5% of the purchase price. When the price exceeds $500,000, the minimum is 5% of the first $500,000 plus 10% of the amount above that threshold. Mortgage loan insurance is not available when the purchase price is $1.5 million or more. Government of Canada
If your down payment is less than 20%, your lender will generally require mortgage loan insurance. This insurance protects the lender in the event of default, not the buyer.
Can you take on the responsibilities of homeownership?
Becoming a homeowner involves more than making a monthly mortgage payment. A home requires maintenance, and certain expenses may arise over the years.
Before committing, ask whether your budget lets you meet the obligations of homeownership while maintaining flexibility for your other needs.
Does the property support your goals?
A home must suit your current circumstances as well as your short-, medium- and long-term plans. Consider:
- the environment where you want to live;
- the type and size of property;
- your personal or family needs;
- the maintenance responsibilities you are prepared to assume;
- your other important financial projects;
- your ability to keep a financial reserve after buying.
A property that uses all your savings could limit your ability to pursue other projects. The maximum amount authorized by a lender is not necessarily the amount you should spend.
Buy with a 20% down payment
A down payment equal to at least 20% of the purchase price generally makes it possible to obtain a conventional mortgage without mandatory mortgage loan insurance.
This option may be appropriate if you also have savings for home-related expenses and your other projects. It remains prudent not to invest all your liquid assets in the down payment.
Even with a 20% down payment, approval is not automatic. The financial institution will assess your repayment capacity, income, debts and credit history, among other factors. In certain circumstances, it may also require mortgage loan insurance.
Buy with a down payment below 20%
You can buy a property without a 20% down payment, provided you meet the lender’s and mortgage insurer’s criteria.
CMHC Purchase can support the purchase of a home with an eligible minimum down payment from different sources. Canada Mortgage and Housing Corporation
This option can reduce the amount you need to save before buying. However, it generally involves a mortgage loan insurance premium. Before making a decision, consider the financing as a whole instead of focusing only on the down payment.
Use the equity in another property
If you already own real estate, its equity may sometimes be used to finance a new purchase. A home equity line of credit or refinancing may provide access to part of that value.
However, this strategy increases your debt and uses the property as security. The amount available depends on the property’s value, mortgage balance and the lender’s criteria. A home equity line of credit generally lets you borrow up to 65% of the property’s value, subject to the applicable rules. Financial Consumer Agency of Canada
This option must be assessed carefully, especially if repayment depends on variable income or the future sale of another property.
Apply with a guarantor
A guarantor or co-borrower may sometimes support an application when the buyer’s file does not meet the lender’s criteria on its own.
The person involved is not simply giving moral support. Depending on the signed agreement, they may become legally responsible for repaying the debt. The decision must therefore be made with a full understanding of the implications.
The responsibilities, repayment terms and possible consequences should be clearly explained before any commitment is signed.
Consider private financing carefully
A private lender may provide a temporary solution in certain circumstances, including when the credit history needs to improve before a new application is submitted to a traditional financial institution.
However, private financing may have different terms from a conventional loan. In Quebec, the Autorité des marchés financiers recommends working with a mortgage broker who is familiar with this type of loan. Autorité des marchés financiers
Before committing, carefully review:
- the interest rate;
- the required fees;
- the financing term;
- the repayment terms;
- the consequences of a late payment or default;
- the planned strategy for obtaining traditional financing afterward.
Someone close to you may also agree to lend you money. In that case, a written and signed agreement remains essential to clarify each person’s responsibilities and prevent misunderstandings.
Consider a rent-to-own arrangement
A rent-to-own agreement may let you occupy a property for a defined period before you decide or are able to buy it.
Depending on the contract, part of the amounts paid may be applied to the future down payment. However, this should never be assumed: it must be clearly stated in the agreement.
Before signing, make sure you understand:
- the planned purchase price;
- the length of the option period;
- the portion of payments that may be accumulated;
- the conditions for exercising the option;
- the consequences if financing remains unavailable;
- the amounts that may be lost if you withdraw.
A qualified professional should review this type of agreement before it is signed.
Rent temporarily to prepare more effectively
Postponing a purchase can be a financially responsible decision. Renting a more modest home, townhouse or condo can give you the time needed to:
- save your down payment;
- improve your credit history;
- reduce certain debts;
- stabilize your income;
- clarify your needs;
- preserve savings for your other projects.
Property prices may change during this period, but buying too quickly also carries risks. The goal is to find a balance between your desire to become a homeowner and your actual ability to maintain that commitment.
Choose the solution that fits your circumstances
There is no universal financing option. The right solution depends on your savings, debt, credit, income and goals.
Before making a decision, compare the possible scenarios and their long-term consequences. A financial institution or licensed mortgage broker can assess the options for which you are actually eligible.
Buying a home requires more than a down payment and mortgage approval. You must also be prepared to maintain the property, absorb unexpected expenses and continue pursuing your other financial projects. Depending on your circumstances, you may consider a conventional down payment, an insured mortgage, help from a co-borrower, private financing or a period of renting. Take the time to compare terms, read every contract carefully and obtain professional guidance before committing.
