Mortgage Down Payments in Canada

Where a down payment can come from

Lenders and mortgage insurers care about two things: where the money came from, and whether you have to pay it back. Money you already own is the simplest to document. A gift is usually acceptable if it is properly documented and is not a loan in disguise. Borrowed money is the category that causes the most difficulty, because it adds a repayment obligation at the same time as it adds to your down payment.

In practice, the following sources are commonly accepted, provided you can document them:

• Savings and chequing balances you have built up over time, with a paper trail showing the balance growing.
• Investments and other assets you sell or liquidate before closing, supported by a statement showing the transaction.
• Proceeds from selling your current home, supported by the sale agreement and the closing statement.
• A gift from an immediate family member, documented with a signed gift letter confirming the money is a gift and not a loan.
• Money released through a first-time buyer program. Federal and provincial programs have their own eligibility rules and limits, so check the current terms rather than assuming you qualify.

An unsecured line of credit for down payment purposes sits in a different category. So does a personal mortgage down payment loan from any lender, or a loan for down payment money arranged through family or an employer. These may be allowed in some circumstances, often for the portion of a down payment above the required minimum or for closing costs, but lenders and insurers generally expect the minimum down payment itself to come from your own resources. If the money has to be repaid, it usually has to be disclosed.

Minimum down payment rules depend on the purchase price, the property type and whether the mortgage will be insured. The Canada Mortgage and Housing Corporation (Canada Mortgage and Housing Corporation) sets out the requirements that apply to insured mortgages. Rather than assume a percentage applies to your situation, check the current rules for your price range and confirm them with a licensed mortgage professional.

How a lender verifies the source of funds

Source-of-funds verification is not a formality. Lenders are required to know where the money in a transaction came from, and mortgage insurers apply their own review on top of that. The process is mostly about paper: statements, letters, and a consistent story that matches the documents.

1. Bank and investment statements. Lenders typically ask for a recent run of statements covering the accounts holding your down payment, so they can see whether the balance built up gradually or appeared as a single deposit.
2. Explanations for large deposits. If a lump sum landed in your account, be ready to show where it came from: a bonus, an inheritance, a property sale, an asset liquidation.
3. A signed gift letter. It names the giver, states the amount, confirms the money is a gift and not a loan, and confirms no repayment is expected.
4. Proof the giver holds the funds. Many lenders ask for the giver's account statement or a transfer record.
5. Sale documents. If the money comes from selling property or investments, keep the agreement, the statement and the deposit record together.
6. Disclosure of debt. If any of the money is borrowed, the loan and its payment must appear in your application, because they affect the ratios the lender uses to qualify you.

You can read how the federal consumer regulator describes the mortgage process at the Financial Consumer Agency of Canada (Financial Consumer Agency of Canada), which explains what lenders must disclose and what you should ask for at each stage.

What a smaller down payment changes

A smaller down payment does not simply mean a bigger mortgage. It changes who can lend to you, what the lender has to test, and what you pay over the life of the loan.

Two facts about how interest works are worth keeping in mind. Canadian fixed-rate mortgages are compounded semi-annually by law, which is why a posted rate and its effective annual rate are not the same number. And rates themselves move: the Bank of Canada publishes the policy interest rate, the prime rate, conventional mortgage rates and Government of Canada benchmark bond yields. Those are benchmarks, not offers, and no lender is obliged to lend at them. The lowest rates are only available to the most qualified applicants.

Borrowing for a down payment: what to watch for

When a loan for down payment purposes is on the table, the question is not only whether a lender will allow it but whether it actually helps you. A personal loan or a line of credit adds a monthly payment to your file, and that payment is counted against the same income the mortgage lender is using to qualify you. In many cases the borrowed money increases your down payment while shrinking the mortgage you can be approved for.

If you already own property, a further set of limits applies. At federally regulated lenders, a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. Drawing on home equity to fund a down payment on another property is therefore constrained by those ceilings, and the new mortgage payment plus the line of credit payment both count in your ratios.

High-cost short-term credit is a different matter entirely. A payday loan is generally up to $1,500 for a term of 62 days or less, and where a province operates a licensed payday lending regime, the federal Payday Lending Regulations cap the cost of borrowing at $14 per $100 advanced. Some provinces set a cap lower than $14 per $100, and the lower cap applies. Quebec does not license payday lending, which effectively prohibits the model there. At the federal level, the Criminal Code criminal rate of interest is 35% per year under section 347. A down payment funded that way is usually a sign the purchase is not yet affordable.

Checks to run before you commit

1. Map every dollar of your down payment to a document you can actually produce.
2. Confirm whether the mortgage will be insured, and read the insurer's current requirements.
3. Ask yourself whether any part of the down payment is borrowed. If it is, get the repayment included in your debt service calculations before you shop.
4. Get a signed gift letter if any of the money is a gift, plus proof the giver holds the funds.
5. Run your own numbers with the mortgage payment, property taxes, heating and any loan payments combined.
6. Check your credit reports with both Equifax Canada and TransUnion Canada, and correct errors early.
7. Confirm who regulates your lender. Federally regulated financial institutions' consumer complaints go to the Financial Consumer Agency of Canada, while provinces license and supervise most other lenders. Lending in Canada is licensed provincially, so the regulator and the rules differ.
8. Talk to a licensed professional about your own circumstances before you sign. Significant borrowing decisions deserve regulated advice.

If your credit history is the obstacle

Sometimes the down payment is not the problem and the credit file is. A consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first. A first bankruptcy stays on a credit report for 6 years after discharge. Both affect which lenders will consider an application and on what terms. Only a licensed insolvency trustee can administer a consumer proposal or bankruptcy, so if you are weighing either option, that is the conversation to have first.

Where loanmoose.ca fits

loanmoose.ca is not a lender. It does not make loans, set rates or make credit decisions. It is a matching and comparison service that helps you see options and connect with licensed providers, who make their own decisions under their own criteria. Nothing on this page is financial, legal or tax advice, and the right answer for your situation depends on your income, debts, credit history, property and province.