How to buy a house with a credit card

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So, if you borrow $25,000, you need to prove you can afford a $750 monthly credit card payment.

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The lender then “stress tests” your mortgage payment using a rate that’s the greater of two per cent above your actual mortgage rate or 5.25 per cent.

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With minimal debt and a solid income (household income must generally be north of $100,000), it sometimes works.

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For everyone else, these debt ratio limits are a deal killer.

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Should you do it?

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If the only way into a house is by financing the entry fee, maybe the home is telling you something.

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Personally, I’ve never been a fan of credit card down payments, given all the things that can go sideways when you’re highly leveraged, including surprise expenses and the risk of negative equity trapping you in the home if values drop.

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Extreme leverage doesn’t care about your intentions. It only cares whether you have room to be wrong.

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That said, proponents believe that if your debt ratios are reasonable and you know your income is going to jump (think doctor, lawyer, engineer or other professional), or you’re new to Canada and just landed a good job, borrowed down payments may make sense.

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For a resident physician a few years from a full salary, the down payment may just be a timing problem.

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And some make the argument that failing to buy now could cost you far more than the credit card interest, which averages 21.21 per cent in this country.

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Put $25,000 on a 21.21 per cent card for a $500,000 purchase, and that’s nearly $6,000 in interest a year if you don’t pay it down.

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Using our example, the default insurance premium for borrowed down payments is 4.50 per cent of the $475,000 principal, or 0.50 percentage points ($2,375) more than if you didn’t borrow the five per cent down payment — plus provincial tax in some provinces.

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But based on Canadian Real Estate Association (CREA) benchmark home prices, the long-run compounded appreciation rate has been about 4.9 per cent annually, or $24,500 on a half-million home.

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Mind you, that appreciation is largely thanks to run-ups in 2006-2007, 2014-2016 and 2020-2021, and may not repeat given government housing supply initiatives, the immigration pullback and affordability challenges.

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Of course, mortgages entail regular interest as well — $19,500 in year one, using our example, and assuming a four per cent rate and 25-year amortization.

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But you have to live somewhere, and waiting has a cost. Hence, you need to also account for rent while you save up to buy (unless your parental landlords are generous).

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So yes, a case can be built for buying sooner on a credit card down payment, but a case is not the same as wisdom.

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Either way, Stillman is exactly right in advising, “If you do it, you have to pay down your card right away.”

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“Also be aware there are a lot of other costs of home ownership that can creep up on you,” he adds. “And it could hurt your credit score if you’re fully utilizing your card.”

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Not surprisingly, lenders and default insurers are picky about such highly leveraged candidates.

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Still, several lenders offer this program, as do all three insurers: CMHC, Sagen and Canada Guaranty. So if someone gets declined by one for a discretionary reason, they can always try the next in line.

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Interestingly, CMHC first introduced a credit card down payment option in 2004.

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They then axed the program in mid-2020 as part of policy changes it said would “protect future homebuyers,” “reduce risk” to “taxpayers,” “(curtail) excessive demand and unsustainable house price growth,” “further manage the risk to our insurance business” and “support the stability of housing markets.”