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I’m a first time home buyer in Canada. I need to pull together ~40K to cover the down payment on a house. I have investments which would cover this cost (mostly in total US market index funds). However, since the stock market is down ~20% since the start of the year and the interest rate on my line of credit is only ~5.5% I’m wondering if it makes more sense to pay the downpayment with my line of credit, and wait for the market to rebound before cashing out. Does this make financial sense?/ can one put home downpayments on unsecured lines of credit? It feels a little bit like I’m over-leveraging myself and taking on debt on top of debt, but the numbers seem to justify it in this case.

(Note: I have looked at similar questions that have been posted, but most of these relate to people buying a second house and taking out a HELOC or not having sufficient funds to cover the downpayment without a line of credit).

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    In addition to whether or not it is a good idea, you need to consider if the bank will be ok with it. When my daughter bought her house we had to sign a piece of paper that the downpayment we provided was a gift, not a loan. Your bank wants to know all your debts and even if you're ok with them, the bank may not be.
    – Kate Gregory
    Jun 12, 2022 at 14:51
  • When I worked mortgage applications in the UK a long time ago, a deposit acquired through loan was specifically not accepted. It's not just a matter of accounting for other debt, the lender wants you to have a chunk of your own money on the line not simply be gambling with other peoples. (Not Canada or recent so I won't post as a reply)
    – Jack Aidley
    Jun 14, 2022 at 10:53

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A couple of things:

the interest rate on my line of credit is only ~5.5%

The line of credit is a loan. The lender will have to factor in the line of credit terms when calculating how much mortgage you can afford. Depending on the numbers involved that could mean you can't afford the house you were expecting to buy.

can one put home down payments on unsecured lines of credit?

The lender is interested in knowing all your financial obligations. The fact that it is unsecured does impact the interest rate of the new loan, but they would also be concerned if you financed a car just before getting the mortgage.

mostly in total US market index funds

this doesn't help you now, but in general the advice is don't put money into stocks if you are expecting to need to use that money in the next few years.

wait for the market to rebound before cashing out.

Nobody knows when that will be. It could be weeks, months or years.

It feels a little bit like I’m over-leveraging myself and taking on debt on top of debt, but the numbers seem to justify it in this case.

Yes you are piling debt on debt.

I am from the United States and can't comment on the tax implications in Canada, but in the US selling losers would avoid capital gains taxes. Also in the US interest on the line of credit wouldn't be tax deductible, but the mortgage interest is.

Make sure you understand how much money you need for the down payment, closing costs and moving expenses. You may be able to find mortgages that you can afford that have a lower down payment requirement.

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No. Interest paid to buy a house is not tax deductible. Interest paid to buy most stocks is tax deductible in a non-registered account. You can sell the stocks and buy the house then re-buy* stocks with borrowed money.

Capital gains may be a consideration. A crashing stock market and housing market may be a consideration.

Look up smith manoeuvre for more information on the details of something similar.

*some caveats about superficial losses may apply.

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