Borrowed and Zero Down Mortgages in Alberta, Canada
Purchasing a home is one of the most significant financial decisions you’ll make, and saving for a down payment can often be the biggest hurdle. In Alberta, there are options available to help buyers who may not have saved the traditional 20% down payment, such as Borrowed Down Payment (Flex Down) mortgages and Zero Down strategies. This guide will explain how these options work, their requirements, and considerations to help you decide if they’re right for you.
What Are Borrowed and Zero Down Mortgages?
1. Borrowed Down Payment (Flex Down) Mortgages
- A Borrowed Down Payment mortgage allows buyers to use funds from a loan, line of credit, or other borrowed sources to cover the required minimum 5% down payment. This program is ideal for buyers with stable incomes, excellent credit and low debt, or other properties to leverage who lack immediate savings for a down payment.
2. Zero Down Mortgages
- While true zero down payment mortgages were discontinued in Canada in 2008, similar strategies still exist. These involve borrowing or leveraging alternative financing to cover the down payment. Buyers still need to provide a down payment, but it can be financed through other means.
How Do These Mortgages Work?
1. Borrowed Down Payment (Flex Down):
- Buyers secure the required 5% down payment through a personal loan, line of credit, or other financing sources.
- The mortgage covers the remaining 95% of the home’s value.
- Lenders evaluate the borrower’s ability to repay both the mortgage and the borrowed down payment loan by factoring both into debt service ratios.
2. Zero Down Strategies:
- Buyers may use gifted funds from family members or government programs like the Home Buyers’ Plan (HBP), which allows first-time buyers to withdraw up to $35,000 from their RRSPs tax-free.
- Alternative lenders may offer programs where equity in another property is used as collateral.
- Some lenders provide cashback mortgages where funds are received at closing and can be used toward the down payment. However, these often come with higher interest rates.
Requirements to Qualify
For Borrowed Down Payment (Flex Down):
- Credit Score: A minimum score of 650 is required, though higher scores are preferred.
- Stable Income: Proof of steady employment and sufficient income to cover the mortgage payments, default insurance premium (Sagen or Canada Guaranty), and the repayment of borrowed funds.
- Debt Service Ratios:
- Gross Debt Service (GDS) should not exceed 35% of gross income.
- Total Debt Service (TDS) should not exceed 42%-44%.
- Closing Costs: Buyers must have at least 1.5% of the purchase price available for closing costs.
For Zero Down Strategies:
- Strong Financial Profile: Excellent credit scores and reliable income are essential.
- Alternative Lenders: May offer specialized programs where equity in another property is used as collateral, or if you don’t qualify for mortgage default insurance.
- Higher Interest Rates: Expect slightly higher rates due to increased lender risk.
- Closing Costs: Similar to Flex Down mortgages, borrowers must demonstrate they can cover closing costs.
Who might consider this:
- Individuals who want to enter the housing market sooner.
- Renters looking to build equity instead of continuing to pay rent.
- Renters wanting to lock in their housing costs especially in markets where rents are rising.
- Buyers in hot real estate markets where home prices are rising faster than they can save.
- Buyers who are able to get a deal on a home that is below market rates.
Considerations and Risks
While these options can help buyers enter the housing market sooner, they come with added risks. Buyers should understand the financial implications of higher mortgage insurance premiums and increased monthly obligations due to the borrowed funds:
- Increased Debt Load: Borrowing for your down payment adds another layer of debt on top of your mortgage.
- Higher Costs: Interest rates on borrowed funds or alternative lending products can increase overall housing costs.
- Limited Equity Cushion: With no upfront equity in your home, you may be more vulnerable if property values decline.
- Stress Test Requirements: Borrowers must still pass Canada’s mortgage stress test by qualifying at either 5.25% or their contract rate plus 2%, whichever is higher.
However, these options require careful consideration of long-term financial implications. Consulting with a licensed mortgage broker can help you explore your options while ensuring compliance with federal regulations and Alberta-specific guidelines.
Conclusion
Borrowed and zero down mortgages provide valuable pathways for Albertans looking to achieve homeownership without traditional savings. However, they require strong financial discipline, thorough planning, and an understanding of lender requirements. By working together with your licensed mortgage broker they can help you evaluate your financial readiness and determine whether these strategies could align with your goals, minimize risks, and be an overall benefit.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always consult with a licensed mortgage broker or financial advisor before making decisions regarding mortgage financing.
