Installment Loans: A way to finance your home
An essential part of buying a house is making a down payment. Your down payment is the upfront sum you put on your house–or any large purchase–so you don’t have to finance the full amount. The more you can put on your down payment, the less you’ll owe on your mortgage.
That’s why some people turn to personal installment loans in Canada to help them finance their down payment.
What is an installment loan?
An installment loan is a loan on which you make regularly scheduled payments. You agree to the terms of the loan when you are approved, so you know each month how much you’ll be paying back, and you know how long it will take you to repay the loan, plus any interest that has accrued.
Unlike revolving credit (such as a credit card), you get the loan amount in a lump sum, so you can’t access the money again once it’s paid back.
Can I use installment loans in Canada to cover a down payment?
In Canada, you can borrow some money to make up a down payment, so long as you’re not borrowing the full amount. Lenders have rules requiring you to provide a certain percentage of the down payment from your own funds. Any borrowing for the down payment is only allowed after you show you meet the minimum requirements from your savings.
What are some benefits of using an installment loan for a down payment?
First, it could save you money on your mortgage. If you put less than 20% down on a house, you have to pay mortgage default insurance (often called CMHC insurance). How much you have to pay depends on the size of your down payment. If you can put down more than 20%, you won’t need mortgage default insurance, which saves you money.
Additionally, you can start growing your net worth by getting into the market. Houses typically increase in value over time–with some notable dips in the market being the exception. Overall, it’s generally beneficial to get into the housing market before prices rise even more. Using an installment loan to boost your down payment can make the process quicker and get you on the path to growing your financial wealth.
Because you set the term length of your installment loan–anywhere up to 60 months–you have the ability to budget accordingly. Just remember that your loan payments follow your payment schedule. So, if you get paid bi-weekly, that is when your loan payment will be deducted from your bank account.
Are there downsides to borrowing money for a down payment?
There are downsides to any time you borrow money. You’ll make two payments on your home, at least until the installment loan is paid off, rather than one. This means you’ll also be paying more in interest than if you saved for the full down payment yourself.
Further, one of the things lenders look for when determining your eligibility for a mortgage is your debt service ratio, which is the percentage of your income taken up by housing costs and other debts. If you borrow money for your down payment, that will affect your debt service ratio, which could decrease the amount you can borrow for a mortgage.
The bottom line
When buying a home, it’s important to weigh the pros and cons of borrowing money to finance your down payment.
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