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Archive for the ‘No Money Down / Zero down’ Category

No Money Down Mortgage / Zero Down Mortgage

Tuesday, October 6th, 2009

Most of the public is unaware that no down payment or zero down mortgages still exist. On October 15, 2008 the rules passed by Canada’s finance minister took effect, and the existing no money down program was canceled. However, only that one program was canceled.

There IS another way…

There are a few banks that will “give” you 5% of the purchase price allowing you to get 95% financing. This program is called “flex down” and here is how it works:

1. You pay posted rates instead of discounted

2. The cash is given to you at closing allowing you to put it as the 5% down payment

3. You need to show cash assets of 1.5% of the purchase price of the home to prove you can afford to close on the transaction

4. Still need a deposit!

5. You pay higher CMHC fees


In mortgages, as in all other elements of business there is no such thing as a free lunch. The 5 year posted rate is 5.49% as of today, with discounted rates in the 3.89% range. You will need to pay the higher 5.49% rate. This way, the bank recoups it’s 5% gift of money that it gave to you over the 5 year term. And yes, you MUST take a 5 year fixed term. It doesn’t matter if you only want a 3 year, or a variable rate, you MUST take a 5 year fixed term at posted rates. In this way, the bank is getting the 5% back from you spread out over the 5 years.

Think of it as forced savings of the 5%, but you get to live in the home while you save!

The 5% cash gets sent to the lawyer’s office handling the transaction. Then, the mortgage money shows up for the other 95% and the house is yours!

The bank needs to know that if they give you the 5% that you can still put up some money to cover property transfer tax (if applicable), move in costs, utility transfers, etc… WITHOUT borrowing the money. You’ll need to show 1.5% of the purchase price of the home in an account in your name. How it got there isn’t an issue. It just has to be in your account.

When you write an offer, you will still need to have money to give as a deposit. This is generally considered “good faith money” as it is non-refundable. Typically, it is customary for the deposit to be 5% of the purchase price. However, this is just CUSTOMARY. You need to tell your realtor that you need the deposit loan as low as possible ($1,000 or $5,000) and you need to be able to write this cheque! You can get it on a visa cash advance, borrow it from friends or family, or what have you.

Remember, you will get it back at the closing date when the bank’s 5% shows up but you still need it in the interim and this is an often forgotten element to no money down purchases.

Whenever you put less than 20% down on a purchase you face CMHC fees. They are government mandated fees, and you can find out more about them and what they are by doing a search on my blog for “CMHC fees” as I’ve written several articles explaining them.

When you do a “flex down” purchase or no money down, the CMHC fees are 2.90% base instead of 2.75% base and they are BUILT INTO THE MORTGAGE – meaning you don’t have to write a cheque for them up front.


I’m working on two of these deals for clients as I type this blog entry, and both are getting approved. So, if someone says zero down or no money down mortgage isn’t available, give them my contact info and I’ll get them set up!

Thanks again, and happy house hunting!

How Credit Scores are Calculated

Wednesday, June 10th, 2009

On every mortgage application, one of the first questions we hear from the lender is: can you send me their credit score. More and more borrowers are becoming aware that the manner in which they have handled their bills, over the past 5 years, has a material impact on their terms and rates on mortgage financing today. Just because a debt that went bad due to a divorce was ultimately paid, the effect can be long lasting, embarassing, and detrimental to future credit applications.

A nice breakdown of how credit scores are calculated came across my desk today and I wanted to post it so that people can see how their score is establisehed (or harmed):

FACTORS                                    WEIGHT          POINTS
Past Payment History               35%                   315
Credit Utilization                        30%                   270
Length of Credit History           15%                   135
Types of Credit in Use              10%                    90

Inquiries                                        10%                   90
TOTAL                                          100%                 900

In Canada we refer to this as your “Beacon Score” but in the USA it is more common to hear it referred to as a “FICO Score”

So, what does this all mean?

Past Payment History: Well, this one is obvious. If you miss a payment, it will show up on your credit and will have a VERY detrimental effect. However, in order to qualify as a “missed” payment, you needn’t be a day or week late. You must be really late. You have be one full payment cycle late before it shows up. So, if your bill is due on the 15th of June, and you forget and don’t pay it until the end of June, it is likely not going to show up on your credit bureau. However, if you miss the June 15th payment, and then miss the next one on July 15th, it absolutely will show up!

Credit Utilization: This the percentage of available credit being used. However, the credit score is calculated by a dumb computer so it doesn’t really do this calculation well. For example, if you owe $450 on a visa with a $500 limit then to the computer that does the scoring, that means you are utilizing 90% of your available credit. This is a very high percentage, and your score will suffer for it. However, if you owe a $450 on a $5,000 visa, it will have a positive effect on your score as the computer will see you are using less than 10% of available credit (even though the amount owing is the same). So, how you allocate your debt is important. It is far better to spread it out over several accounts, than load up one card. Then again, if you pay it off every month in full, you never have to worry about this.

Length of Credit History: The longest that an item remains on your credit is 72 months or 6 years. Each “Trade Line” or account reports the number of months reporting, and the longer the better. This can be important because people may have a Sears card they forget about that has 72 months reporting of good usage (even though they never ues it) and they always say, “should I cancel it?” I wouldn’t. That long lasting, but still current, account has a very positive impact on your score that can help mitigate other areas you may not score as well on.

Types of Credit in Use: Certain types of credit are worse than others. For example, finance companies (Wells Fargo, Citibank, etc…) score low, whereas visa cards and revolving credit facilities score high. Also, the number of recently opened accounts has an impact.

Inquires: This is the most misunderstood portion of the bureau, but one that people guard jealously. The more “inquiries” (companies looking at your credit score) the lower your score. However, you can see this accounts for only 10% of the score. Also, the folks operating the credit bureau don’t want to hamper you from shopping around, so all applications done within a 7 day period (for a similar type of account – mortgage versus finance company, for example) count as 1. More will show up, but the impact on your score is minimal. Also, you are allowed to have inquiries! Just because an inquiry was on there, doesn’t mean your score is low. However, if you apply at TD for a visa, RBC for a loan, a finance company for a secured card, and then Hydro pulls your bureau as well, you can expect it to drop. How much? Even then, it might be a few points. If you score well in other areas, you shouldn’t even be given this a thought. However, if you are re-building your score, you should monitor this carefully.


Minimum = 300
(Lowest I’ve ever seen is 393)

Maximum = 900
(Highest I’ve ever seen is 826)

Average = 660
(More likely 660-680)

A good score = 680+

A great score = 700+

So that should give you a good primer on what scores mean, how it is calculated, and what you can do to preserve yours.

Your credit is like your reputation: it takes years to build, and only a couple stupid moves to tear it all down…

Vendor Takeback Mortgages – Are They All They Are Cracked Up To Be?

Monday, March 23rd, 2009

I take inquiries and questions from clients about Vendor Takeback Mortgages on a weekly basis. The purpose of this blog is to both clarify what precisely a Vendor Takeback Mortgage is, and where it is, and is not, helpful in arranging financing.

First, it is important to be clear what we are taking about. A Vendor Takback mortgage is one where the vendor “takes back” a mortgage when they sell a property. So, let’s use some round numbers to help this make sense. In this case, the home purchase price is $100,000.

If a vendor (seller) agrees to “take back” a $20,000 mortgage (for example) this means that the buyer has to get $80,000 of financing from the bank, and the vendor will register a 2nd mortgage for $20,000 behind the bank financing.

The first question is, “why would the seller do this?” or “why would the buyer want this?

Typically, vendor takebacks get requested when the buyer doesn’t have a down payment, or enough of a down payment. If a buyer sees a property that they really want, but they don’t have any cash available for a downpayment, then how do they get one? They borrow it, and in the case of a vendor takeback, they borrow it from the seller!

The reason a seller would agree to do this (effectively lending $20,000 to a buyer) is because they will usually get a superior rate of return (often greater than 10% per year interest) than they would get otherwise in term deposits or other secure investments. For example, if bank rates on mortgages are 4.09% for the first $80,000 then the seller may request 12% for the $20,000 (for example) vendor takeback. This would mean the buyer would have a monthly mortgage payment on the $80,000 he borrowed from the bank ($424.5 per month assuming a 25 year amortization). Then, the buyer would also have a payment to the vendor for $200 per month (assuming interest only at 12% per year on the $20,000 vendor take back).

Now, clearly, the payment for the vendor takeback is higher, due to interest rate, than the bank mortgage. You may find yourself asking, “so why would anyone do this?” The answer is, 99% of the time, they don’t have the cash for the down payment. In this manner (vendor takeback) they are able to buy a property, with essentially no money out of their own pocket.

In this case, at the closing date, the buyer would get his $80,000 for the bank and turn it over to the seller, and the bank would register a mortgage against the property as security for $80,000. Then the seller would effectively take a $20,000 IOU (registered as a 2nd mortgage) instead of the balance of $20,000 in cash. The sale price of the property is still $100,000, and eventually the buyer will have to pay that money, but they are essentially borrowing the down payment from the seller in exchange for paying a higher-than-bank-rate return.

Sounds great? Not really.

My example above makes a couple of assumptions that may or may not be true.

The assumptions are:

1. The seller has to have the $20,000 in equity in the property, AND be willing to lend it (i.e. not need it to buy another home) at the agreed-upon rate.

2. The bank doing the $80,000 mortgage has a right to prevent the vendor takeback mortgage from being registered at the closing date.

3. My example presumed a 20% vendor takeback (to avoid CMHC insurance fees) but usually vendor takebacks are much smaller (percentage-wise) as vendors (sellers) don’t want to lend that much, or don’t have that much equity.

4. There are still closing costs that must be paid in cash such as property transfer tax, legal bills, adjustments, etc… that were left out of the example for simplicity.

5. There was still a payment required on the vendor takeback mortgage that the buyer has to be able to afford.

Let’s address each of these in turn as they are important considerations:


If the seller doesn’t have the $20,000 of equity built up in the property, then they cannot do the vendor takeback even if they want to. They have to have the money in order to lend it! Also, the seller of the property is likely going to go and buy another property (although not necessarily). In order for them to be able to do a vendor takeback, they have to have enough alternative resources to buy their next home assuming they buy one.


The bank doing the 1st mortgage may or may not allow a second to be registered. This depends on the lending institution, but most chartered banks do not allow secondary financing to be registered at closing. Why? Because they perceive the additional mortgage (and payment) as increasing the overall risk of the deal. If the client qualifies for the mortgage traditionally, why not borrow it from the bank at bank rates? The reason is that people often look for a vendor takeback when their bank won’t approved them for more money due to income, credit, or some other policy reason. As a first mortgage lender, the bank (or whomever) is doing the 1st mortgage has a right to dictate whether or not secondary financing (vendor takebacks) is available or not. This is just the way it is. If they are going to lend, in our example, $80,000 then they have the right to dictate the terms of the financing, and nearly ALL banks do NOT allow secondary financing.

That point bears repeating: MOST BANKS DO NOT ALLOW SECONDARY FINANCING. There are exceptions, but most banks insist that at least 5% or 10% of the purchase price come from the buyer’s own resources. There are no chartered banks, that I am currently aware of, that will allow 100% financing by way of a vendor takeback. None. Unless policies have changed recently, there are no banks that allow 100% financing by way of a vendor takeback. Why? Because the government recently mandated that the 100% financing be cancelled and the banks all support this ruling.


In many cases, the vendor doesn’t want to do a 20% (or more) vendor takeback. In Canada, if you have less than 20% equity, then bank will charge you CMHC fees (mortgage default insurance that, if you default, the bank gets paid out of the insurance fund). These fees are NON-negotiable. They are law.

With the high price of homes in Vancouver, people usually ask if they can do a vendor takeback for only 5% or 10%. With a home price in Vancouver of around $720,000 (on average for a single family home) 10% down is $72,000! This is a considerable amount to ask a vendor to “carry” or lend back as a vendor takeback on purchase.

Let’s continue with our simplified example of $100,000 purchase price and see how a vendor takeback applies (or doesn’t apply). If the buyer requests a 5% vendor takeback, and gets 95% financing from their bank. Here is how the numbers look:

$100,000 Purchase Price
$95,000 1st Mortgage
$2,612.50 CMHC Fees (added to mortgage)
$97,612.50 Net Mortgage (97.62% financing)

$5,000 Vendor Takback Mortgage (5%)

5% + 97.62% = 102.62% financing (oops… over 100% financing isn’t allowed in Canada)

So, as you can see, CMHC fees, when added to the mortgage (they are added to the mortgage 99.9% of the time) force the financing higher than the original 95% amount. With the vendor takeback, we now exceed 100% and no bank in the land will allow this.

The only way that this MIGHT be allowed, is if a person pays the CMHC fees out of their pocket. However, if that have that cash laying around, they usually want to put it as a down payment to avoid paying interest. I have never had a client, in nearly 10 years of banking and finance, pay CMHC fees out of their own pocket. While technically possible, people usually just don’t do it.

The lesson to take away from this is that CMHC fees usually mess up the financing plans. So, unless you can talk a vendor into lending you 20% or more (or have some of your own equity plus a vendor takeback to sum to 20% of the purchase price), CMHC fees will screw up the plan. This is usually a moot point as most banks insist on 10% of your own equity into the deal. They want to see that you have some “skin in the deal” and stand to lose if you walk away just like they lose if you walk away or get foreclosed on.


Even if you manage to get a vendor takeback, there are still closing costs to be paid. You can’t borrow more than 100% so you can’t “roll it into the mortgage.”

For example, on our $100,000 purchase, assuming you don’t qualify for the first-time homebuyer exemption for transfer tax in BC, the closing costs you will face are:

$1,000 Property Transfer Tax
$1,000 Appoximate Legal Costs
$1,000 Move-in fees, utility transfers, miscellaneous fees
$250 Adjustments for property taxes, etc…

$3,250 of CASH you will need to have access to at


People often say to me, what if the vendor takeback is from my parents. They will sell me their property, and give me the 20% of down payment (to avoid CMHC fees) but they will do it interest free with no payment so we can qualify for the 1st mortgage with the bank. Even if they don’t charge interest, and have no payment, the bank doing the 1st mortgage will ALWAYS make an assumption of a payment when qualifying you. This is a point of bank financing you just have to learn to accept. Even if the vendor takeback is done with 0% interest and no monthly payment, the bank will ASSUME YOU STILL HAVE A PAYMENT WHEN QUALIFYING YOU.

This point often makes first time homebuyers upset, but it is something that I’m yet to see an exception made on. I’ve never seen a charterd bank allow a vendor takeback with 0% and no payment without calculating SOME form of payment into the calculations on the 1st mortgage. When the bank is qualifying a buyer for the 80% 1st mortgage (or whatever amount it is) they will “plug in” some number for the vendor takeback mortgage payment, even if it doesn’t exist. This is just a conservative move that the banks do to ensure a buyer can realistically afford a mortgage (and vendor takeback if the parents or vendor change their mind and charge interest later on – something the bank has no control over once the mortgage funds).


So, I’ve spent the last 95% of this blog post, and video blog, explaining why vendor takebacks don’t work. So when do they work?

Typically, I see vendor takebacks on commercial deals. This is because on a commercial deal, all the rules I talk about above don’t apply. For this reason, I see them on large land deals, massive development projects, and commercial property purchases. If your purchase is of a commercial nature, talk to me about how to set up a vendor takeback with the seller as our options expand exponentially.

Based on the rules I’ve described above, if you have 10% down, and can get more (say 10% more) so that you can avoid CMHC fees, then we may be able to work something whereby you can get a vendor takeback. If you are in a position to come up with 20% down payment (whether from own resources or from a vendor takeback), please call me or email me to discuss how to structure this. I can assist you (or the vendor) with the mortgage document preparation and can advise all parties as to the risks and rewards of such a structure.

BOTTOM LINE: With the current bank restrictions, rules, and market panic, vendor takeback mortgages are difficult to structure and make a deal work. However, they ARE possible – and are particularly workable within a family looking to assist children buy their first home. Contact me for more detail and we can discuss a structure that works for you.

Developers Sue Buyers Who Walk Away From Their Deposits

Tuesday, February 3rd, 2009

A colleague of mine passed this article on to me and I found it very interesting. With prices of pre-sales falling below what people paid for them, they are opting to simply walk away from their deposit. I had a client recently who put $20,000 on a $200,000 condo (10%) but the appraisal for the condo came in at $180,000. That would be similar to 100% financing, which isn’t available any longer, so he had to put an additional $9,000 into the deal. He decided to walk away from from his deposit rather than sink another $9K (which he didn’t have). He may be sued by the developer if this article is correct.

Frankly, I think he should be sued. The developer agreed to sell him the unit at $200,000 and he is supposed to complete. We all know that if the property had risen to $250,000 he, the buyer, would have gotten to keep the $50,000 profit even though the developer did all the work. Many people, self styled as “investors” have made a living this way for the past few years as the market has risen. They enter into the contract hoping prices will rise and they will earn a great return. Well, now the market has changed, and prices have fallen. Buyers shouldn’t expect that they can just walk away from the loss. The developer doesn’t get to share in the profits when prices go up, so why should you be able to walk away? Well, it looks like you can’t if this article is any indication. And so the fun begins…

_______________________ Begin Article _______________________


Maureen Enser, executive director of the Urban Development Institute, says the Morgan Heights lawsuit is the first case she has heard of a developer suing buyers who have walked away from pre-sale contracts.

One Metro Vancouver developer is suing pre-sale buyers in a project for trying to back out of their deals, which could be the leading edge of a trend, according to a property law expert, as buyers grapple with a real estate market where prices are falling and gains buyers were expecting have disappeared.

Amacon has filed suit against seven buyers for defaulting on their contracts to buy condominiums in its Morgan Heights development in south Surrey on purchases that were to have closed in early December.

In the writs of summons for those cases, Amacon seeks the forfeit of the buyers’ deposits and damages, which in the reading of lawyer Nick Preovolos, could be substantially higher, even if the condominium’s value has dropped by more than the amount they’ve put down.

“Walking away doesn’t solve the problem,” Preovolos said, because a developer can sue for damages, and damages would be defined as the financial difference between the current market value the developer could sell for and the price the buyer agreed to pay in his contract.

If a buyer put down a $25,000 deposit and the property sells for $100,000 less than the initial purchase price, Preovolos said the original buyer still owes the developer $75,000.

“It’s a serious liability for someone to pull out of a purchase,” Preovolos said. “They’d better have a good reason that they can argue in court.”

He added that a buyer’s inability to get a mortgage to complete the purchase because the property has lost value is not a reason that a court will accept.

Preovolos said developers are often reluctant to sue clients, because that can be damaging to their reputations. At some point though, developers will act to protect their interests if they start to risk substantial losses.

And with thousands of condominium units currently under construction across Metro Vancouver as property values slide in a slowing market, “my guess is we would be seeing more of these cases,” Preovolos said.

Amacon official Bob Cabral said the company would not comment on any case it is party to that is before the courts.

North Vancouver lawyer John Whyte represents one of seven buyers Amacon has filed suit against.

Amacon claims Whyte’s clients, Daniel and Jasbant McGarvie, defaulted on the purchase of a $445,000 condo in the Morgan Heights development when they didn’t complete the deal last Dec. 12 as specified in their contract.

And Amacon is seeking the forfeit of the $22,245 deposit they put down to secure the unit, plus other damages.

Whyte said his clients’ defence is that the couple have simply rescinded their purchase contract, as is allowed under provincial real estate regulations, because Amacon did not forward them all changes to its official disclosure statement for the Morgan Heights project.

Whyte said Amacon filed an expanded disclosure statement with the Superintendent of Real Estate, as it is required to do, but his clients did not receive the document, which contained significant new financial details about the project budget.

The McGarvies’ are now countersuing Amacon for return of the deposit, plus a $6,000 payment they made for a flooring upgrade.

Maureen Enser, executive director of the Urban Development Institute, said this is the first case she has heard of a developer suing buyers who have walked away from pre-sale contracts.

However, Enser does not believe stories of pre-sale buyers attempting to abandon their contracts and give up deposits will become rampant because there has been less speculation over the past couple of years.

More buyers, she said, have bought pre-sales because they want to live in the apartments and not because they expected to flip them at profits upon closing.

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Private Mortgages – When to Use them and Why – PART 1

Tuesday, October 28th, 2008

“Twelve Percent!” the client screamed into the phone, “that is highway robbery!”

This is a common phrase I hear everytime I quote the rates on a private mortgage. The reality is that no matter what the market is doing, private lenders tend to want around 12% (possibly plus fees).

So why are the rates so high? Who would take those rates? The answers to these questions are important, and they are the subject that we will explore today.

First, why are the rates so high? Well that depends on if it is a first or second mortgage, what percentage of the home’s value is being borrowed, and the client’s credit and situation. These are complicated questions, so this is going to be a two part post. Let’s address each in turn. We’ll start with a few topics today and few more tomorrow.


First mortgages are generally more safe than seconds, and seconds are more safe than thirds, and so on and so forth. The reason is that in the foreclosure process, if a client isn’t paying the first mortgage, the 2nd (or 3rd) mortgage holder may have to pay out the 1st mortgage to preserve their investment. If the foreclosure process is started, the owner generally has 6 months to bring things back up to date or the courts will issue an “Order Absolute” which wipes out all mortgages behind the 1st mortgage and leaves the property in the possession of the 1st mortgage holder. While this is VERY rare, it does happen, and therefore, if a client defaults on his first mortgage, the 2nd mortgage holder (or third) may have to pay out the first mortgage (in cash) so that they move into 1st position and preserve their investment.

Let’s use a concrete example so that this makes sense:

Assume a home is worth $400,000 and the client has a $200,000 1st mortgage with, say, TD Canada Trust. They have accumulated $50,000 of credit card debt, and have started missing payments. Their credit score gets hurt, and as a result, TD will not advance them any additional funds. However, there is a LOT of equity available there ($200,000 worth!). This is a prime situation for a private mortgage where a lender will take a 2nd mortgage, usually at rates of 10% – 14% depending on the risk and property.

Now, if the client doesn’t keep their 1st mortgage up to date, TD may start a foreclosure process which will (in general) give the clients 6 months to bring things back up to date or TD takes the house in lieu of payment. IF this happens, the 2nd mortgage holder loses their money! Their mortgage is wiped out!

To prevent this from happening, the 2nd mortgage holder needs to have enough money on hand to pay out TD (in this situation) so that they take over the 1st position (and thus take over the foreclosure). There is an alternative that the 2nd mortgage holder can pursue called “Conduct of Sale” where they can force the home to be sold through court ordered sale to recover their money – but they have to prove their equity is at risk – and this can be difficult depending on the situation.

So, as you can, the possible responsibility of having to come up with $200,000 cash is a serious risk, plus the hassle factor, that results in private lenders looking to get paid a higher rate of interest (and fees) to do a 2nd mortgage.


As a general rule, you can borrow only 75% of a home’s value by way of a private mortgage. There ARE some lenders that will, in this market, go to 80% or even 85% but you can expect VERY high rates and fees for this as the risk (especially in today’s market) is that the prices will continue to fall and the lender may end up having loaned more than the home is then worth.

The higher the percentage being purchased, the higher the risk, the higher the rate you will pay. I have seen private first mortages as low as 6% when the client is borrowing less than 50% of the home’s value. I have also seen private mortgages of 19.5% when the client was borrowing 85% of the home’s value.

So what is the “value” that the lenders use? They will usually request an appraisal from one of their preferred appraisers who they trust, and who has sufficient experience in an up AND down market to properly peg the value of a property. You should consult the lender or your broker before shelling out cash for an appraisal as many lenders will only accept one or two appraisal firms in town.

Bottom line: the higher percentage you borrow, the harder it is to get financing, and the harsher the terms, rates, and fees.


When you get a bank mortgage, they will do a lot of due diligence to confirm that a client has sufficient income, credit history, and character to repay a loan. Private lender’s don’t care as much about income and credit as they do about equity. They are, generally, more concerned with the amount of equity behind them than with the client’s credit or job. In many cases, they will not even condition for proof of employment! For this reason, private lenders are the lender of choice for people in tough situations such as:

1. Prior recent bankruptcy
2. Current divorce, not yet settled
3. Very poor credit
4. Collections and judgments on credit
5. Child support in arrears
6. Unemployed applicant who hasn’t yet found a job
7. Fast turnaround situations requiring funds in as little as one day
8. Properties that the bank doesn’t like to finance (leaseholds or bed and breakfasts homes, for example)
9. Bridge financing when the bank won’t offer the bridge from one home to another
10. Top up when the bank will only lend, say 65% but the client needs another 10% to close on the purchase

There are many many more reasons, but these are all situations where a private lender may step in.

In the next part of this article I will provide the type of terms you can expect, rates, fees, as well as some elaboration as to specific situations where a private mortgage is highly beneficial and the preferred choice.

No Down Payment Mortgage – How to Buy a Home with Zero Down

Tuesday, September 23rd, 2008

When CMHC announced they were cancelling the Zero Down program and 40 Year Mortgage, I heard one mortgage broker remark that it was the beginning of the real estate recession. I first scoffed at his comment, but then had an absolute ton of applications for both of these product along with many, many, many applications that did not qualify. There was a rush of people trying to get in under both programs, and it was clear that a lot of people had assumed the zero down program or No Money Down Mortgage program would still be around. I also made this assumption.

So HOW DO YOU GET A NO MONEY DOWN MORTGAGE now that the rules have changed?

Prior to the current zero down program, there WERE other ways to buy with no down payment. Originally it was called “Flex Down” and this program allowed you (at the expense of a slightly higher CMHC fee) to borrow your down payment from a credit card, personal loan, family, or through a lender cashback incentive offer. This program still exists! However, there are a couple of rules:

1. Just having the required 5% down payment does not mean you qualify. You still need to prove adequate income and credit history. If you are borrowing the down payment, you can expect your bank to be extra strict on what they will or will not allow.

2. If you get the downpayment in the form of a cashback from your lender (For example, Scotiabank has a 5% cashback program where they will gift you the down payment) you can expect the following:

- A higher rate than everyone else with a saved up down payment is getting
- Harsh penalties if you break the term of the mortgage (maybe an extra large penalty)
- Forced repayment of the cashback if you sell the property or break the term of the mortgage

An example of how this looks is as follows. Let’s say you see a condo for $400,000 in downtown Vancouver that you like. You have a good job, great credit, no other debts, and you want to see what sort of terms are available.

OPTION #1 – Cashback mortgage

Under this option, the bank will GIVE YOU 5% of the purchase price (in this case $20,000) at the closing of your purchase that you can use this as the 5% down payment. Instead of the 5.50% that everyone else is able to get, you will be paying 6.70% instead. This will pay the bank back for their gift of $20,000 over the life of the mortgage. Therefore, your payments will be higher. In this case you will be paying $2,402 per month instead of the $2,090 that you would be paying if you had saved up the down payment. That is $312 more because you got the gifted downpayment from the bank. $312 x 60 months in a term = $18,720 which essentially repays the bank over the term of the mortgage. Should you pay out the mortgage early, you may face a longer than 3 month interest penalty (6 months, for example) and you will likely have to repay the bank the 5% gift they gave you. These are standard terms, and you will NOT be able to avoid them no matter how long you have banked there, or how much your family has with them. There is no free lunch in this game, and you can expect fees.

OPTION #2 – Borrowed Downpayment

Under this option, you will borrow the down payment from a visa or loan at whatever rate they charge (could be as high as 19% or more!) BUT… and this is a big “but”… you will get to borrow the rest of the mortgage at the fully discounted 5.5% rate. Most people will take an interest only line of credit at, say, 9.75% for the $20,000 needed and borrow the rest fully discounted at 5.50%. Under this scenario you would face the following payments:

$162.50             Payment on Line of Credit
$2,094 Payment on mortgage

So, compare this to the payment of a gifted cashback downpayment versus a saved downpayment versus the current (but cancelled) zero down payment program. Here is the comparison:

$2,211.00                   Current program (being cancelled Oct 15th, 2008)
$2,090.00                   Saved Down Payment
$2,256.60                   Borrowed Down Payment
$2,402.00                   Gifted / Cashback Down Payment

So clearly, it is cheaper to save the down payment, but not everyone can do that. The next best option is to borrow it, but not everyone has th credit score to pull this off. Lastly, you can do a cashback mortgage, but even this requires a certain level of credit and income that not everyone has. However, these are three options for a no down payment mortgage that existed before the current program came into effect, and all will remain after the current program is cancelled.

So, in summary, zero down and the no down payment mortgage IS still available despite the CMHC rules changes. If you are having trouble obtaining financing, please let me know and I will make sure we set you up appropriately.

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Friday, May 2nd, 2008

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