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

POSTED RATES:

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!
CASH GIVEN AT CLOSING

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!
NEED TO SHOW 1.5% CASH ASSETS

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.
STILL NEED A DEPOSIT

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.
HIGHER CMHC FEES

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.

THAT’S IT!

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!

So I haven’t posted in over a week, and it’s been because i’ve had my head down working like a dog while reeling from the effects of the last week’s meltdown in the financial sector. Finally, after an up and down week, and Fed in the US approved the bailout. You would think that this is great news for the real estate industry, right?

I’m not so sure. What this plan effectively did is nationalize a private problem. There is a saying somewhere that when profits are made they are private, but when losses are taken, they’re public. I know that isn’t a direct quote, but it is close enough to get the gist of it. It is also very very true. So long as the market continued along unabated, with profits being made, private investors got to keep all their profits, spend it as they wished, and not have to pay anything other than taxes. When the problems set in, and the investors all stood to lose a lot of money, enter the Fed and a massive public bailout that effectively increases the national debt that took them over 100 years to build by 10% in a single blow. I don’t like the precedent that this sets, and hope that the bailout doesn’t totally bail out all the lenders and institutions that acted irresponsibly over the past 8 years. That said, I also don’t want the market to go into a tailspin and melt down.

A lot of the price appreciation we have seen in Vancouver Real Estate in the past few years is driven by the market being very desirable to live in, own in, and even rent in. As a result, prices have (and should have) risen. However, as someone on the front lines of mortgages and real estate, I DO think that prices have gotten ahead of value, and we are in for a correction.

Unlike the United States market, however, I do NOT think that prices will come crashing down around us. Our lenders up in Canada, (yes, even those based out of the US) were more conservative than there brethren in the US and required a borrower to have more than a pulse and sufficient body temperature to warrant getting approved for a mortgage.

Did we have true sub-prime lending in Canada? Yes, but only at a few lenders, and always at no more than 95% financing with most preferring to remain at less than 80% financing even on rock-solid properties. The US actually had lenders lending (in some rare cases) up to 125% of the purchase price with the hopes that property prices would continue to rise and put the clients back “into the black” in a few short years. While this strategy allowed clients to roll all their other debts into their mortgage as well, it only worked while prices continued their meteoric rise upwards. When they started to roll back, that was the end for those lenders (and insurers who insured the mortgages).

So where are we going from here? I met with a few other brokers over the weekend and we chatted about where the market is as well as some of the large pull backs in prices we have seen recently. Most of us agree that prices are likely still going to continue downwards for a while, and the fact that money is still getting tighter and tighter and guidelines more and more restricted will only compound this issue in the near future. CMHC is slated to release some new guidelines any time soon, and I suspect that their “Self Employed Simplified” program will disappear or reappear in a far more conservative form. This could make it far more difficult for self employed borrowers who show no income to get qualified. Given the very high percentage of self employed borrowers in BC, this will have a disastrous effect on real estate prices if we are correct. I hope that we aren’t.

So, if prices continue to decline, should you still buy?

The answer depends on your plans:

1. If you intend to buy and hold it for 5 years or more, then yes you should still consider purchasing rather than renting.

2. If you are buying an investment property, I would likely shy away from the Vancouver market in the next year.

3. If you are intending to flip the property, DO NOT get into this market. I have many, many buy-and-flip investors who have purchased properties, poured $100K into them, and cannot sell them for their original purchase price at this point. Buy and flip is not shrewd in this market unless you are buying at a substantial discount and putting essentially no capital into it.

The bottom line is that if you are buying a home, long term, you should always get into the market, buy as much house as you can afford, and let history, scarcity, and payments do the rest for you. You will always come out ahead, and I defy anyone to prove a 10 year period in Canadian history where if you purchased you would have been better off to have rented. That period doesn’t exist, and for that reason, buying property in Vancouver is still a good LONG TERM investment.

Happy hunting!

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
$2,256.60

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.

There are several tricks that you can utilize (some with caution) when pricing your home. I usually like to leave pricing of a property up to the realtor that is listing it, but from time to time you may want to provide a bit of your own input. The price of your home is important because it is usually the first thing that a buyer looks for on a MLS Listing. They want to know if your home is in their price range before they even look at the features it possesses. Many buyers simply walk away from homes due to them being poorly priced and/or confusingly priced before the buyer even looks at the property.

The five points I am summarizing below are from www.canadarealtynews.com and I found it to be a fairly good write-up on the issue.

1. PRICE IT RIGHT

In order to set the right price, check out the competition first. This is normally the job of your listing agent who will answer the question: what are similar homes selling for. Note that i wrote “selling for” and not “listed for” because there can be a large difference between the two. You need to look at how long the other properties listed and sold were on the market, what amount of price negotiation took place between list price and final price? (Only your realtor can provide this information as the final sale price is not publically available very easily). Pricing your home lower than the competition may result in many more offers that drives the price higher. Alternatively, pricing it too high may result in buyers walking away or not evening looking at the property due to “sticker shock.”

2. THE MISSING PENNY TRICK

To grab the attention of potential buyers, take a tip from discount retailers like Wal-Mart. For example, $19.99 versus $20.00. While only one penny apart in price, the brain perceives the $19.99 lower due to some psychological reason whereby people make snap judgments based on the the first number they see. As we read from left to right, if we see a 1 instead of a 2, we may, subconsciously, assume that the $19.99 is a better bargain. Therefore, listing a home at $199,999 may generate more business than listing it at $200,000.

3. RAISE THE REFERENCE POINT

If you ask a higher price, people will also instinctively assume that they are getting more value, and you will have raised their reference point. You can affect the reference point of buyers by telling them the selling price of other properties in the area. Use this information with caution however, and only if the comparisons you are drawing are in your favour.

4. SEND THE RIGHT MESSAGE

People associate precise numbers with a bargain. They assume that if you price something at $493,495 that you have thought very carefully about the price of the home and the value you are offering. Setting a round number such as $495,000 conveys openness and a willingness to negotiate. Note, however that setting too specific a price may convey that you are not very open to negotiation as you have a very specific value in mind. Use this trick with caution.

5. MAKE PRICE CUTS EASY TO UNDERSTAND

We perceive easily computable (but smaller) discounts as better than larger (but confusing) discounts. When a home has been on the market for a long time, the logical move is to reduce the asking price, but by how much? The trick here is to reduce the price by an easily computable amount. For example, if you were asking $495,495 you would want to reduce it to $485,485 as this is an easy to calculate $10,000 price reduction. You wouldn’t want to drop it to $478,995 as this is a confusing discount that cannot be easily calculated in one’s head. Make the number nice and easy to calculate so buyers can see how much they are saving easily and without a calculator.

This article was re-printed and summarized from www.Canadarealtynet.com