Key Takeaway

When a home appraises for less than the purchase price in Canada, your lender will base the mortgage on the lower appraised value, not the agreed price. If you included a subject to financing clause in your offer, you can typically walk away and recover your deposit. Without that protection, you may need to increase your down payment to cover the gap or negotiate a lower price with the seller, or risk losing your deposit if you cannot complete the purchase.

What Is a Low Appraisal

A low appraisal occurs when a professional appraiser determines that a property’s fair market value is below the purchase price you agreed to pay. Canadian mortgage lenders order an independent appraisal before finalizing your mortgage approval to confirm that the home is worth what you are borrowing against it. The appraisal protects the lender: if you default and the lender forecloses, the property must be worth enough to recover the outstanding loan balance.

According to the Canada Mortgage and Housing Corporation, the appraisal is a standard part of the mortgage underwriting process and directly influences the loan-to-value ratio your lender will approve (CMHC, 2026). The loan-to-value ratio (LTV) is the mortgage amount divided by the appraised value or purchase price, whichever is lower. If the appraisal comes in under the purchase price, the lender calculates your maximum mortgage using the appraised value, which means you must find more cash to complete the transaction or renegotiate the deal.

Why a Low Appraisal Matters

A low appraisal disrupts the financing you were counting on. Suppose you offered $600,000 for a home and planned to put down 10 per cent ($60,000) and borrow the remaining $540,000. If the appraisal comes in at $575,000, your lender will approve a mortgage of no more than 90 per cent of $575,000, which is $517,500. You now face a $22,500 shortfall: the difference between the $540,000 you expected to borrow and the $517,500 the lender will actually lend.

The shortfall must be covered by additional cash from you, a price reduction from the seller, or a combination of both. If you cannot close the gap and your offer did not include a financing condition, you risk forfeiting your deposit and facing a breach-of-contract claim from the seller. The Financial Consumer Agency of Canada emphasizes that buyers should understand the appraisal process and the importance of protective clauses in purchase agreements (FCAC, 2026).

Foundational texts such as Principles of Finance explain that valuation is central to lending decisions: the lender’s security is the property itself, and an accurate appraisal ensures that the collateral covers the loan in the event of default. When the appraisal falls short, the lender’s risk increases, and the buyer must either add equity or walk away.

What Happens to Your Offer

Your purchase offer is a binding contract once the seller accepts it and all conditions are met or waived. If your offer included a subject to financing clause (also called a financing condition), you have the right to cancel the contract if you cannot obtain mortgage approval on acceptable terms. A low appraisal that prevents you from securing the full financing you need typically qualifies as grounds to invoke this clause, allowing you to exit the contract without penalty.

If you did not include a financing condition, or if you waived it during a bidding war, the contract remains binding regardless of the appraisal result. You are legally obligated to complete the purchase at the agreed price. Failing to close exposes you to breach-of-contract liability: the seller can keep your deposit, sue for damages, or force you to complete the sale through specific performance in some circumstances.

In practice, many buyers in competitive markets waive conditions to make their offers more attractive, but this increases the risk. If the appraisal subsequently comes in low, you have no automatic exit and must find a solution or face the consequences.

What Happens to Your Deposit

The deposit you submit with your offer (typically one to five per cent of the purchase price) is held in trust by the real estate brokerage or a lawyer until the transaction closes. If you included a subject to financing clause and the appraisal prevents you from obtaining financing, you can cancel the contract and the deposit is returned to you in full.

Read also: Gifted Down Payments in Canada: What Lenders Require to Accept Family Money

If you did not protect yourself with a financing condition and you cannot complete the purchase, the seller is entitled to keep the deposit as liquidated damages and may pursue additional compensation if the deposit does not cover their losses. The size of the deposit and the terms of the contract determine what happens, but the baseline rule is simple: a valid condition protects your deposit, while an unconditional offer puts it at risk if you cannot close.

Your Options When the Appraisal Comes in Low

When faced with a low appraisal, Canadian buyers typically have four options:

Increase your down payment. If you have the cash available, you can make up the shortfall by putting down more money. In the example above, adding $22,500 to your down payment covers the gap and allows the transaction to proceed. This increases your equity immediately but reduces your liquidity.

Negotiate a lower purchase price. You can ask the seller to reduce the price to match the appraised value. Sellers are not obligated to agree, but they may prefer a modest price cut to relisting the property and starting over, especially if other buyers are likely to encounter the same appraisal issue. Your negotiating leverage depends on the market, the difference between the appraised value and the offer price, and the seller’s circumstances.

Challenge the appraisal. If you believe the appraisal is inaccurate, you can request a second appraisal or provide the lender with comparable sales data that supports a higher valuation. Lenders occasionally reconsider, but they are not required to accept a new opinion, and ordering a second appraisal costs time and money.

Walk away using your financing condition. If you protected yourself with a subject to financing clause, you can cancel the contract, recover your deposit, and resume your search. This is often the safest choice when the appraisal gap is large and you cannot afford the additional cash.

Conclusion

A low appraisal in Canada reduces the maximum mortgage your lender will approve and forces you to cover the difference, renegotiate the price, or exit the contract if you included a financing condition. The appraisal protects the lender by ensuring the property is worth the loan amount, but it can disrupt your purchase if the value comes in below your offer. Your deposit is protected if you included a subject to financing clause and you cannot obtain the necessary financing; without that condition, you risk losing the deposit and facing breach-of-contract liability if you cannot complete the sale.

This article provides general educational information only and is not personalized financial, legal, or lending advice. Mortgage products, appraisal practices, contract terms, and buyer protections vary by province, lender, and the specific terms of your purchase agreement. Consult a licensed mortgage broker, real estate lawyer, or the Financial Consumer Agency of Canada for guidance on your specific situation before making binding commitments.