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.

The last few days in the financial markets have been complete chaos. First the 4th largest investment bank in the country files for chapter 11 bankruptcy, and immediately following this, the government bails out one of the largest mortgage default insurance companies in the country. It seems that the government is picking and choosing who they are going to bail out. For example, why not Lehman Brothers? No one seems to have any good answers as thousands of investors have eaten major losses in the Lehman Brothers failure, but then those invested in AIG have been bailed out. Why? There doesn’t seem to be any rhyme or reason, and if there is one thing in the financial markets that people don’t like it is uncertainty.

So how have these problems made their way up to Canada? Many people think that the sub prime problem is centered in the US and that we in Canada are isolated despite the US being our largest trading partner.

To understand the effect that the US crisis is having on Canada, you first have to be aware of how interconnected the banking and mortgage world is. For example, the government in US bailed out AIG, the largest single corporate holder of mortgage insurance. They are similar to CMHC and Genworth in Canada who allow lenders to lend more than 80% of the value of a property. AIG recently came up to Canada and launched aggressive new lending guidelines that revamped the face of the mortgage industry and cause CMHC and Genworth to also change their guidelines or risk being thrown to the side of a rapidly moving business.

Rumours have abounded for the last few months that AIG was no longer insuring mortgages in certain areas of Canada where it felt prices had gotten ahead of values. Although I have nothing to substantiate this claim, the two cities I heard most about were Calgary and Edmonton, both of which have experienced sharp price pullbacks.

So what is mortgage insurance and what is it for? Traditionally, banks could only lend up to 75% of a home’s value, but with the National Housing Act which set up CMHC in the 50’s (I think) banks were able to lend more than 75%. This type of mortgage is referred to as a high-ratio mortgage. What the insurance covers is default, or, in other words, when someone doesn’t make payments and the bank has to foreclose. In this case, the insurance company pays the bank any losses it incurs as a result of the foreclosure. Up until 8 years ago, only CMHC was around, but then GE (a division of General Electric) got into the market, and then recently AIG came up from the US. That makes 2 of the 3 of the insurers in Canada US firms! Should the US market start to take a dive, and should the insurers in the US (there are many more down there) start to take a beating, and start to go out of business, then we in Canada will likely see their Canadian arm disappear or retract and tighten up (as we ARE seeing). Should those companies fail altogether, it will leave Canadians with fewer choices for mortgage insurance, and we will likely see a major real estate correction. Fewer choices means less competition, and less competition means lower prices. It is simply supply and demand.

Add to this flux in the US the fact that rates in the UK have shot up dramatically in the past week. The LIBOR or London Interbank Offered Rate went from 3.33% to 6.44% in one day. That is nearly DOUBLE, and this is the rate that many mortgages in the US and Canada are pegged to. If this type of increase and volatility continues, you can expect banks offering variable rates to trim their discount dramatically. This is already happening with CIBC leading the charge and reducing their variable discount to prime – 35% (on average) and Royal Bank, TD, BMO, and many others following suit. We may soon see a time when variable rate mortgages are no longer offered below prime and could even be offered ABOVE prime if the volatility continues.

So that is the state of the mortgage world in Canada at the moment. I have a sneaking suspicion that the Sub Prime fallout is far, far from over, and that things will get much bleaker before they get better again. Ultimately, all this debt has to be repaid. It doesn’t just vanish, and whether it is investors (i.e. you and me), the governemtn (i.e. you and me), or borrowers (i.e. you and me) you can see that crunch time is upon us and will continue for some time.

I will try and update the status of this worldwide credit crunch more and more as it continues to be a major cause of concern for buyers and borrowers.