Can I Use Life Insurance for a Down Payment? (GTA Homebuyer’s Guide)

Saving a down payment is one of the biggest hurdles to homeownership, especially across the GTA. If you have permanent life insurance (whole life or universal life), you might be wondering whether you can use it to help fund your purchase. Could that be the missing piece that gets you through the door of a Toronto condo, a Mississauga townhouse, or a family home in Etobicoke?

Below, you will find how it works in Canada, lender and insurer rules you must meet, tax risks to watch, and smarter alternatives to consider—so you can decide confidently.

The 3 Ways Life Insurance Can Fund a Down Payment

1) Withdraw cash value (permanent life only)

Permanent life insurance (whole life or universal life) can build cash surrender value. You may withdraw part of this value and use it toward your down payment. Withdrawals reduce the policy’s cash value and potentially the death benefit, and amounts above the policy’s adjusted cost basis (ACB) are taxable as income.

2) Take a policy loan from the insurer

Instead of withdrawing, you can borrow against the policy. Policy loans accrue interest. If not repaid, the balance is taken from the death benefit. Loans are generally not taxable when advanced up to ACB, but any excess over ACB is taxable, and a later lapse with a loan outstanding can crystallise a taxable gain.

3) Use a collateral assignment to borrow from a bank

You can pledge your policy as collateral for a bank loan or line of credit. The bank underwrites you, your credit, and the policy values, then advances funds you can use for the down payment. The assignment ends when you repay the loan.

Will Lenders and Insurers Let Me Use a Borrowed Down Payment?

How lenders view life-insurance-sourced funds

• If you withdraw from your policy (no borrowing), lenders generally treat it as your own resources, subject to standard documentation.
  
  

• If you borrow—via a policy loan or a bank loan using collateral assignment—many insured products allow a borrowed down payment for strong files. The carrying cost of the new loan must be included in your TDS.
  
  

Programs that currently allow it

• CMHC permits non-traditional down payment (e.g., unsecured loans/LOCs) at 90.01%–95% LTV for 1–2 units when borrowers have strong credit and funds are arm’s length.
  
  

• Private insurers offer specific products (e.g., Canada Guaranty Flex 95 Advantage, Sagen Borrowed Down Payment) that allow borrowed sources, with maximum GDS 39% / TDS 44%, and payments must be counted in TDS.
  
  

Key Rules GTA Buyers Should Know

Minimum down payment, price caps, and insured eligibility (updated)

• The insured-mortgage purchase-price cap increased from $1,000,000 to $1,500,000 on December 15, 2024. Minimum down payments remain 5% on the first $500,000, 10% on the portion above $500,000 up to $1.5M; homes ≥$1.5M require 20% down and are not eligible for default insurance.
  
  

Debt-service ratios and the stress test

• High-ratio files typically follow GDS 39% / TDS 44%. If your down payment is borrowed, that new loan payment is added into TDS.
  
  

• Lenders must qualify you at the higher of 5.25% or contract + 2% (the federal stress-test rule).
  
  

Proving your source of funds (compliance)

Be ready to show insurer or bank statements, any assignment document, and a clear paper trail into your lawyer’s trust account. Ontario lawyers must identify/verify clients and record source of funds under LSO By-Law 7.1, and AML expectations continue to rise. Start early to avoid delays.

Taxes and Traps: Read This Before You Tap Your Policy

ACB, withdrawals, and policy loans—in plain language

Your policy’s adjusted cost basis (ACB) is the tax benchmark used to determine if there’s a gain.

• Withdrawals above ACB are taxable as income.
  
  

• Policy loans are treated as a disposition; amounts above ACB are taxable, and a future lapse with a loan can trigger tax.
  
  

Interest deductibility

Interest on money borrowed to buy your principal residence is generally not deductible in Canada. Interest may be deductible when borrowed to earn income (e.g., investments or rental property), but this is a technical area—get tax advice.

When Using Life Insurance Might Make Sense

• You hold a mature permanent policy with meaningful cash value, and you are within a few percentage points of the required down payment.
  
  

• You can comfortably carry the extra loan payment (policy-loan interest, or bank line of credit) within TDS limits, even after the stress test.
  
  

• You have a plan to restore your coverage (e.g., repay the loan over 12–24 months) so your family’s protection is not permanently reduced.
  
  

• You are optimising for speed to close—tapping policy value can be quicker than liquidating certain investments.
  
  

When to Think Twice (or Avoid It)

• Your policy is term insurance (no cash value to access).
  
  

• The added payment would push your TDS beyond the lender’s limit, or leave no cushion for rate changes.
  
  

• You want to preserve the full death benefit, and a loan or withdrawal would compromise it.
  
  

• The policy’s cash value is early and fragile; withdrawing now could stunt long-term growth.
  
  

• You have cleaner, tax-efficient options available.
  
  

Smarter First-Line Alternatives for First-Time Buyers

• FHSA: tax-deductible contributions and tax-free qualifying withdrawals for a first home. Can be combined with the HBP.
  
  

• Home Buyers’ Plan (HBP): limit increased to $60,000 (effective April 16, 2024); repayments over time.
  
  

The Takeaway

You can use life insurance to supplement a down payment in the GTA—typically by withdrawing cash value, taking a policy loan, or arranging a collateral-assignment bank line. The right path depends on your ratios, taxes, and the value you place on keeping your family’s coverage intact. For many first-time buyers, FHSA and HBP are simpler, more efficient starting points with clearer tax benefits.

Buying or selling in the GTA starts with sound advice, sharp strategy, and a team that knows the market. Contact The Johnson Team to start working with an agent right away. We will map your budget, model the numbers (including any borrowed down-payment impact), and help you choose the cleanest funding path to the keys.