It was not too long ago that this product was available and a client could get into a home with 0 down payment. The rules have changed and the days of the TRUE 0 down have gone.
The old program incorporated a cash back on the day of closing. Clients would prove they had their closing costs and on the day of the closing lender would forward 5% to the lawyer to cover the down payment. It was a great program but the rate was high. (basically you are paying the down payment back via a higher rate of interest)
The Government has since put into legislation that all clients must prove a down payment prior to the day of closing. This means you have to have a down payment up front. This down payment can be in the form of gifts from immediate family members, investments, savings and RRSP’s to name a few.
I am seeing in the market place that people are still advertising 0 down mortgages which is false and people need to realize the actual cost of falling prey to this type of advertising.
There are a few options to help you in getting your down payment. You can actually borrow the funds for your down payment and you can still get a 5% cash back on closing. You must understand though that you are still required to prove a down payment up front even with the cash back programs. The best solution is to borrow the funds and once the deal closes you can pay off the monies you borrowed for the down payment. You must remember and take into consideration though that the cash back program will be at a higher rate of interest.
The insurer allows this program under their Flex Down program but charge a higher fee to do this. The fee for normal down payments (gifted/savings etc) is 3.6% while the fee for non-traditional down payment (borrowed funds for example) is 3.85%
So let’s look at how the numbers will look. We will use a purchase price of 200k and a 5% down payment or $10000. This will equate to net proceeds of 190k. We must now include the insurer CMHC fee on top of this amount. Under the flex down program this would be 3.85% given us a mortgage amount of $197315.00.
*We note this is for illustrated purposes only and is assuming 60 monthly payments made*
Now we will use the 5% cash program. The 5 year fixed rate at present is 4.64% which would generate a payment of $1107.49 per month. After 5 years you will have paid about $42769.29 in interest and your balance would be around $173634.89. You would have also taken the cash back and paid off the loan you borrowed to secure your down payment.
Now lets look at the other option. In this option you will still borrow the down payment up front. We are going to use an interest rate of 6% and borrow 10k. This will generate a payment of around $192.99 and you will pay around $1579.10 in interest over 60 payments. We will now take the mortgage amount of $197315.00 but will use a discounted rate of 2.49% (current 5 year fixed rate being offered in the market today – O.A.C). This is going to give you a payment of $882.93 per month for 60 months. After 60 months you will have paid around $22630.06 in interest and your balance will be around $166969.86. You will have your loan payment also so your total monthly payments will be $1075.92 and your total interest paid will be around $24209.16.
Option 1 Option 2
Interest paid – $42769.29 Interest paid – $24209.16
Monthly pmts – $1107.49 Monthly pmts – $1075.92
What option would you want?
Now I realize you may not be in the position to take option 2 and that’s fine but you need to understand this up front and educate yourself on all your options prior to making a decision. Also remember that you can opt for a 1,2,3 or even 4% cash back option. This will help with closing costs etc but the less cash back you take the lower the rate is. One last thing to take into consideration the pay back of the cash back if you decide to break the contract and pay out the mortgage prior to the 5 year term. The majority of lenders use a pro-rated system but you need to ensure you know the policy to avoid any surprises in the future.
As a mortgage broker it is our duty to provide you with all the options that are available for your situation and guide you to take the best option for your situation and wants. So if a broker is only offering you one product you need to ask yourself why and ensure you ask what other options are available. If they are not offering other options or telling you this is the best option then you need to ask why. As you can see from the above example the wrong option will cost you over 18k in interest. Mortgage brokers are now required to be licensed in NB so ensure you are dealing with a licensed broker and make sure they are offering you the right options.
Call me today and let’s discuss these options and any other questions you may have. As we hear quite often one call could save you thousands of dollars.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage broker for TMG – The Mortgage Group Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online. If you are a First Time Homebuyer then get your free report here. If selling/refinancing a home get your free report here to avoid some common mistakes.
