How to Buy a House With No Down Payment in Ontario

The dream of homeownership in Ontario can often seem distant, particularly due to the significant financial hurdle of a down payment. While securing a traditional mortgage with absolutely no down payment is uncommon, various strategies and programs exist to substantially reduce the upfront cash required from a buyer. This guide explores these options, offering insights for those navigating the path to owning a home with limited initial funds.

Understanding Down Payment Requirements

In Canada, down payment requirements are based on property price. For homes $500,000 or less, 5% is required. For prices between $500,000 and $999,999, buyers need 5% on the first $500,000 and 10% on the remainder. Homes $1 million or more require a 20% minimum down payment.

When a down payment is less than 20%, the mortgage is high-ratio, requiring mortgage default insurance. This insurance, provided by entities like CMHC, Sagen, or Canada Guaranty, protects the lender against potential losses. The premium is added to the mortgage amount and does not protect the borrower directly. Paying 20% or more down avoids this insurance and may lead to more favorable mortgage rates.

Leveraging Funds and Programs

Several avenues can assist aspiring homeowners in Ontario with gathering funds for a down payment, including government programs and family assistance. These options make homeownership more accessible by reducing upfront cash.

Gifted Down Payment

A gifted down payment involves receiving money from an immediate family member. Lenders require a signed gift letter from the donor, stating the funds are a gift, not a loan. There are no tax implications for gifted funds in Canada. Immediate family members are the most commonly accepted source, though some lenders may consider gifts from extended family with additional documentation.

Home Buyers’ Plan (HBP)

First-time homebuyers in Canada can utilize the Home Buyers’ Plan (HBP) to withdraw funds from RRSPs. This program allows eligible individuals to withdraw up to $35,000 tax-free. Repayment to the RRSP is required within 15 years, starting in the second calendar year following the withdrawal. Failure to repay results in the outstanding amount being added to taxable income.

First-Time Home Buyer Incentive (FTHBI)

The First-Time Home Buyer Incentive is a federal shared-equity program to lower monthly mortgage payments for first-time homebuyers. The government provides a portion of the home’s purchase price for a shared equity interest. For existing homes, the government contributes 5% of the purchase price; for newly constructed homes, it can be 5% or 10%. The incentive must be repaid after 25 years or when the home is sold, whichever comes first. Repayment is based on the home’s fair market value, meaning the government shares in gains and losses.

Borrowing a Down Payment

Borrowing a down payment via a personal loan or line of credit is viewed unfavorably by mortgage lenders and carries risks. Lenders scrutinize debt load, and an additional loan can negatively impact debt-service ratios, hindering mortgage approval. This increases financial burden, as both the mortgage and down payment loan must be serviced, leading to strain.

Exploring Non-Traditional Paths

Beyond conventional mortgage financing, alternative strategies exist to facilitate homeownership without a large traditional down payment. These non-traditional paths involve unique transactional structures.

Rent-to-Own Programs

Rent-to-own programs offer a pathway to homeownership by crediting a portion of monthly rent payments towards a future down payment. A tenant lives in the home for a specified period, with an option to purchase at a predetermined price. The agreement includes a non-refundable upfront option fee, and a portion of each rent payment is set aside as a down payment credit. This enables individuals to build a down payment while residing in their prospective home, offering stability and the potential to lock in a purchase price.

Vendor Take-Back Mortgages

A vendor take-back mortgage (VTB) occurs when the seller acts as a lender, providing a mortgage for a portion of the purchase price to the buyer. This arrangement benefits certain market conditions or unique properties where traditional financing is challenging. Terms, including interest rates and repayment schedules, are negotiated directly between buyer and seller, offering flexibility not found with institutional lenders. While VTBs reduce the amount a buyer needs to borrow from a bank, they are less common for covering the entire down payment. They are typically used to bridge a financing gap or make the property more attractive.

Beyond the Down Payment: Other Financial Considerations

Securing a down payment is one step. Other financial obligations accompany home purchase and ownership in Ontario. Buyers must budget for these additional expenses, separate from the down payment.

Closing Costs

Closing costs are one-time fees due on or before the closing date, ranging from 1.5% to 4% of the purchase price. A significant component is the provincial Land Transfer Tax (LTT). Properties in Toronto also incur a Municipal Land Transfer Tax (MLTT), effectively doubling this burden. First-time homebuyers may be eligible for rebates: up to $4,000 for the provincial LTT and up to $4,475 for the Toronto MLTT, reducing this expense.

Other closing costs include legal fees, ranging from $1,200 to $2,400, plus disbursements for title searches and registration. Title insurance protects against title defects and fraud, costing $200-$500. Other costs include appraisal fees ($250-$700), home inspection fees ($300-$750), and adjustments for prepaid property taxes or utilities.

Ongoing Homeownership Costs

Beyond closing, homeowners face recurring expenses. Property taxes are levied by the municipality based on assessed value. Home insurance is mandatory to protect against damage and liability, costing around $1,250 per year in Ontario. Utility costs (electricity, gas, water) vary based on usage and home size. Maintenance and repairs are ongoing; a guideline suggests budgeting 1% of the home’s value annually. Condominium owners also pay monthly condo fees, covering shared building expenses and amenities.

Credit Score Importance

A strong credit score is fundamental for mortgage approval. Lenders use credit scores, which range from 300 to 900 in Canada, to assess financial reliability. A higher score (above 700) indicates lower risk to lenders and can lead to more favorable interest rates and terms. Conversely, a low score might result in higher interest rates or mortgage denial.

Mortgage Pre-Approval

Mortgage pre-approval before searching for a home is a strategic step. Pre-approval provides a clear understanding of the maximum mortgage amount a lender will offer, allowing buyers to focus their search within an affordable range. It also demonstrates to sellers and real estate agents that a buyer is serious and financially capable, advantageous in a competitive market.