I bet you thought after last week, we were done talking about mortgages! But how can we pass up a topic like THIS?
As real estate prices continue their unfathomable climb, and buyers watch as affordability slips away, we have another feature (along with 2.84% mortgages…) to further prop up the market.
Yes, folks, 100% financing is back!
It’s not as absolute as it was back in 2005, ie. you do need some money to qualify, but there are still lenders out there that have no problem giving mortgages to borrowers who have almost zero skin in the game.
There are pros and cons to this offering, so before you write it off completely, let’s examine…
Folks, I’d like to introduce you to something called “perspective.”
You see, when my mortgage broker told me last week, “You won’t believe this – 100% is back,” I was not on the same page as him.
You see, my mind immediately went elsewhere.
My mind went to a place where many, if not most of our minds would go……….South Korea!
Raise your hand if you don’t hear “100%” and immediately think of the hit Korean boy-band pictured below:
Seriously, it’s so hard to choose a favourite.
I always thought I liked Liam the most, but now it’s Bradley.
Nah, definitely Bradley…
How do I go from Korean boy-band-based sarcasm to a serious topic?
I guess we’ll find out…
Back in 2005, I had a client purchase a house with no money down, AND get money back.
His house cost an even $1,000,000, and with the 107% financing package that existed at the time, he closed on the house (paying legal fees and land transfer tax), and then was given a cheque for $70,000 by the lender to do with, as he pleased.
Times have changed since then…
We’ve seen the elimination of the 40-year amortization, the minimum 5% down payment for properties under $1,000,000, the minimum 20% down payment for properties over $1,000,000, and the minimum 20% down payment for secondary properties and/or investment properties.
These rules have helped tighten the mortgage market, and effectively caused consumers to take on less debt.
But as the lead-in to this blog suggested, it seems times are changing again. We seem to be reverting back to yesteryear, despite CMHC and Jim Flaherty’s attempts to rein in debt.
After BMO announced last week that a 2.99%, 5-year, fixed-rate mortgage was being offered to borrowers, other lenders followed with rates as low as 2.84%.
Later last week, some lenders started email blasting the entire province advertising the come-back of 100% financing.
That’s right – lenders will loan you the 5% you need to provide as a minimum down payment, so you can effectively purchase a property with no money down.
There are a few catches, however. Or maybe they’re not “catches,” per se, but rather points you might assume come with an offering like this:
1) You must have your own closing costs. Lenders are looking for 1.5% of the purchase price.
2) The interest rate is 4.85% over five years.
3) If you break the mortgage before the five years are up, you have to pay back the 5% loan on a pro-rated basis.
4) Owner-occupied properties only.
5) No rental income allowed to qualify.
6) Must have good credit and good income to qualify.
7) Cannot be used for Coops, student or rooming houses, B&B’s, Historical designations, commercial properties or mixed use, raw or leased land, seasonal access properties, mobile homes, prior grow ops or meth labs, life lease agreements, fractional interest, rental pools or hotel condos.
I don’t think anything on that list should come as a surprise.
Maybe, just maybe, you’re looking at the 4.85% interest rate and shaking your head.
But what do you expect?
Why else would a lender offer to loan you a down payment to purchase a property?
So I’m interested to know what the general public thinks of this offering.
On the one hand, you might suggest, “This is the last thing the market needs right now, as prices are skyrocketing, and lenders are helping to drive up the price. With consumer debt in Canada at an all-time high, this product is an absolute joke.”
On the other hand, you might suggest, “This product allows people with good income and great credit to get into the market today, and not miss out on further property appreciations over the coming years where they would otherwise be saving for their down payment.”
I know I’ll get opinions from the general public, in the form of my readers, but I also wanted to know what the mortgage community thought about this product, so I asked Joe Sammut:
“I believe there is a place in the market for this type of product. Consider someone renting and paying market rent in Toronto and the GTA, trying to find a way to save for a 5% downpayment. Unable to save large amounts of money each month, yet affordability is not an issue as they are currently paying a high rate of rent. This can be the product that helps them make the leap to home ownership.
Another way to look at it is to consider that there is an element of “forced savings” when paying a mortgage. Each payment includes a portion that goes to the repayment of the principal amount borrowed for the mortgage. This can be looked at as the “savings” that renters are working hard to achieve. *A $400,000.00 mortgage at 4.85 requires a monthly payment of $2292.00. Of that amount, $691.00 goes to repay principal on the mortgage, the balance is interest. As the months go by, more of the monthly payment goes toward the principal repayment allowing the homeowner to build equity in their home. Add to that, a hope that the market will continue to rise and their home will increase in value as the years go by.
Yes the rate is higher, currently 1.76% higher than today’s 5 year fixed conventional (to 80% loan to value) and high ratio insured (to 95% loan to value) of 3.09%, but if cash flow and affordability allow for the monthly payment then this could be a great option. As always, I recommend that everyone review their options with an experienced Mortgage Broker. Read the fine print! Make sure the terms and conditions are clear and concise before selecting this or any other mortgage product.”
Mortgage Architects #10287
*oac and E.O.& E.
*Rates are subject to change
I don’t disagree with anything Joe is saying.
For the buyer who has no down payment, but has an amazing credit score, and a great job, this is an option to purchase.
The other option, of course, is to tap out your line of credit.
But you need to show that funds have been in your bank account for 90 days to qualify with most lenders. So if you took $20,000 off your LOC today, you’d be able to purchase in July with that money as a down payment. The issue, of course, is that you’re paying interest on that money, and you have to wait three months to make a move.
And then I would also wonder if a would-be buyer with no down payment has access to a $20,000 LOC anyways.
But I like the idea of “forced savings,” since many Canadians are terrible with their money (as evidenced by the 170% ratio of debt-to-income), and the example above shows that buyers using this product would be paying down principal on their mortgage.
And I honestly don’t think we’ve seen the last of “special products” like the stripped-down 2.84% mortgages, or the sneaky 100% financing.
The mortgage market is tight, and lenders are scrounging to find ways to make money. A lot of these products (notably the stripped-down mortgages) act as loss-leaders so that lenders can get your chequing accounts, savings accounts, credit cards, investments & RRSP’s, and other products that will make them far more money than a mortgage at rock-bottom rates.
In the end, like every product, every year, at every rate, and offered by every lender through the history of time – it’s up to YOU to decide what works best.
And for the rest of us, we’ll just sit around and debate the state of the Canadian economy, debt markets, et al….