Don’t Look Now – But 100% Financing Is Back!

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…

100PerCent

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:

100PerCentBoyBand

Seriously, it’s so hard to choose a favourite.

I always thought I liked Liam the most, but now it’s Bradley.

Or Jonas.

Nah, definitely Bradley…

100PerCentBoyBand2

Anyways…

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.”

Joe Sammut,
Mortgage Broker
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….

48 Comments

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  18. Lior, Mortgage Edge says:

    We’ve done a few of these 100% financing deals. It is definitely a niche product. For those of you who are asking about the lender, it’s Meridian and they can offer 100% financing because as a credit union they are not a federally regulated financial institution. This type of financing is a good option for consumers who have steady income, very strong credit, and little debt. Instead of waiting to accumulate a sizable down payment, especially with where home prices are in Toronto, this products allows these clients to get into the home ownership market with covering just the closing costs. The interest rate is quite higher than a conventional 5-year fixed based on today’s rates but for those who are qualified and are looking to get into the market with no saved down payment, this is the only choice they have. For the right person, it can work, and as Joe said, it requires taking into account different scenarios that may impact the client’s ability to pay a substantial mortgage payment. Another item that was absent from the original post is that this product is available for properties that are in the vicinity to a Meridian branch (20 minutes drive to an urban branch).

  19. Paully says:

    Yep, giving huge mortgages to people who do not have the means or ability to save a minimum 5% down is a great idea. It worked out so well in the USA.

  20. JP says:

    I don’t disagree that 100% financing can be useful for certain customers, but it scares the heck out of me.

    I used to work for a builder not too long ago and we were selling houses in the upper 200k lower 300k range just outside the GTA.

    I don’t know how many people came in asking about the deposits and didn’t even have the initial $5000 payment. Back then, the on-site bank rep was only too happy to swing 100% financing for them in one form or another. I’m more of the opinion that if you don’t have a 5k deposit for a house, maybe you shouldn’t be buying a house.

    Then there was a tiny house in Corktown this week that sold for 70K over asking. Just shy of 700K for what is essentially a 1 bedroom home (one of those “currently 1 bedroom but easily converted back to 2 bedroom jobs) …. “but it has a basement rental!” Cute yes, 700K? Crazy.

    1. Kyle says:

      I’m totally with you. This idea scares the crap out of me. I think whomever came up with this idea, only went so far as plugging numbers into a risk formula and stopped there. Sure, from a credit risk perspective a measly 5% down payment represents a rather small reduction in the potential loss – nothing more, but anyone who has saved for a down payment knows it represents much more than that. It represents an ability to prioritize and allocate a finite amount of income wisely, it represents an ability to defer consumption over immediate gratification, it represents financial discipline. Traits not everyone has. There are lots of people who want EVERYTHING and they want it NOW. They find ways to spend every penny of disposable income and then some: on rent, clothes, vacations, meals, entertainment, cars or whatever. There is no discerning between “needs” and “wants”, to them they’re all “needs”. So when you replace rent, with the higher costs of home ownership, i think it is unrealistic to expect that these people who never had the financial discipline to save 5%, will suddenly discover the financial discipline to reduce spending on all the other items in their life. And i think this type of mortgage is like a big giant beacon calling to people like that.

      1. AndrewB says:

        ^ This.

        Many people could afford if given 100% financing, but like you said, do they have the financial discipline to follow through on the day to day costs of home ownership. I’ve heard many say that owning is cheaper than renting its equivalent, but they fail to see all the other associated costs with home ownership.

  21. Anton says:

    The 167% ratio of debt-to-income does NOT include mortgage debt.

    Otherwise that number would be staggering – in the 500% range.

    It’s funny (maybe the wrong choice of word) but most people see that 167% number and think “That’s so high, how is that possible?” Maybe the readers of this blog are more affluent and responsible, but somewhere out there is somebody making $30,000 per year who has $50,000 in debt.

    I think student loans play a huge factor, specifically doctors, lawyers, dentists, MBA’ers, and those who take out $100K in loans and pay it back with inteterest as they hope and prey their salaries slowly increase throughout their 30’s. It would be ignorant to suggest that most of the debt is held by poor people living off credit cards, when in fact many professionals are carrying 6-figure debt-loads.

    1. Appraiser says:

      “The 167% ratio of debt-to-income does NOT include mortgage debt.” ~Anton

      WRONG! Anton needs to do more research before hitting send .

      1. ScottyP says:

        Yeah, you gotta love it when people can pull comments such as “it’s not 167%, it’s like 500%!” out of their ass and not even blink.

  22. G___ says:

    Concur with Kyle, supra.

    This will help move starter condos to those of us with enough school debt that 2 years of that repayment = down payment yet we can still carry a 1.3-1.7k monthly rent.

    Run the numbers, Caveat emptor, and YMMV.

  23. Neil says:

    Not having the 5% down payment costs a lot over the 5 years of the mortgage. Let’s say you want to buy a $300,000 condo. 5% down is $15,000. If you don’t have this, your monthly mortgage payment with a 30-year amortization is $1,574 and you pay $67,800 in interest over the 5 years. Your principal owing after 5 years is $273,000.
    If you have the $15,000 down payment, the monthly mortgage payment is $1,212 (3.09% interest, 30 years amortization). You pay $40,900 interest over the 5 years, a saving of $27,000 over the 100% financing case. Your principal owing after 5 years is $253,000.
    So not having a $15,000 down payment costs you an extra $27,000 interest over the 5 year mortgage period.

    1. Alex says:

      But if the condo’s value increased 5% each year for all 5 years then you’ve gained ~$80000 in equity (assuming it takes you 5 years to save the downpayment). So this mortgage only makes sense if condo and house prices keep going up at record levels, and I’m sure that is how the bank is selling it. I wouldn’t take it, but I can see an investor who can handle some risk taking this.

      1. ScottyP says:

        If it’d take 5 years for you to save $15,000 for a down payment, you should probably not be buying in the first place.

        1. Stacey says:

          What is your profession? Are you qualified to declare such a strong opinion as though it is fact?

          How many people can say they have encountered hefty expenses in a 5 year period, such as medical, travel, theft, spousal support or divorce, new business, job change, family in retirement homes, family in rehabilitation, …. There can be set-backs along the way.

          I agree Alex. Unfortunately it is not as clear cut to segregate home buyers into 2 specific categories, to be on one side of the fence or the other. There are renters, divorcees, older adults, young families, immigrants, … everyone has a new scenario. That is why there are an abundance of mortgage products, purchase incentives, rebate offers available from lenders and our government. Created to cater to as many situations as possible.

          As a broker, every file crossing my desk is different. Every product for these clients is tailored to their needs. That is the point of brokering. That is the point of the 100% financing. It is back because there is a need for it.

          Home ownership is wealth, and without owning those buyers may never increase their financial worth. Let the buyers that are able, incur higher payments for the 5 years, and earn a discounted rate for their next term. The stipulations should keep out those that simply CAN’T as you have described.

  24. Jason H says:

    I would hardly say that debt levels have dropped in the mortgage market because they are still very high.

    164% this quarter vs 164.3% this quarter last year.

    The fact that 100% mortgages are back shows how bad the housing market is doing – even though prices are climbing. Banks need their profits.

    I like Kyle’s points.

  25. Kyle says:

    I think this is a really terrible idea. This type of mortgage targets 2 types of people:

    1. Those who on paper SHOULD be able to afford a house, but HAVEN’T YET come up with the 5% down
    2. Those who on paper SHOULD be able to afford a house, but CAN’T come up with 5% down.

    Sure there are some in the first camp for whom this makes sense, like newly minted Doctors, Lawyers, Dentists and Investment Bankers, or more generally anyone whose financial situation has drastically improved, but does not want to wait until they saved up a down payment. But i think there are a lot more people who fall into the second camp. Those who are just plain bad with money, no matter what their income. If they can not save 5% when they’re renting, they have no hope in hell of making ends meet, with the additional cost of home ownership.

    I’m sure the Quants did all sorts of fancy modeling to figure out that the additional 1.76% spread, covers the additional credit risk that not having 5%, BUT i think the Quanst are missing a very basic assumption about human nature. Anyone who SHOULD on paper be able to afford a house, SHOULD also be able to save up a down payment, since renting cost much less than owning. What their models don’t capture is that If the applicant CAN’T save a down payment, it usually has nothing to do with how much income that person makes and everything to do with how much that person spends.

    1. ScottyP says:

      Well said.

  26. Joe Q. says:

    David writes: “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)”

    Doesn’t that 170% (I think it’s actually closer to 165%) include mortgage debt? In which case the argument becomes circular…

    1. Schmidtz says:

      No.

      Mortgage debt is DEBT. Reducing this debt via forced savings reduces the debt.

      Your comment is invalid.

      1. Joe Q. says:

        Re-read David’s comment. He points out that buying a home with 100% LTV at least forces a marginal buyer into “saving” his money, and that there are plenty of people who have problems saving their money, as evidenced by the high debt-to-income rate in Canada.

        But since major housing debt is itself a huge part of that high debt-to-income ratio, the argument closes back in on itself.

  27. IanC says:

    Let’s say that you can get a good product that is not “stripped down” for under 3%.
    (Details appended)

    Now the zero down product – sure it helps people could not get in the game otherwise, but let’s look at the real costs from Joe’s example.

    Joe’s interest rate would incur $90,540 in 5 years (60 payments). A competitive rate at 2.99% for 400K would incur $55,228.49 or a difference of $35,311.51 in interest.

    $35K. Ouch!

    Appended details:
    ==============
    My five year fixed rate that I signed 7 days ago at TD was 2.99%. It included 15% annual prepay and up to doubling of each regular prepayment options, and is portable. Scotiabank was offering 2.94% for 5 years (extending their 4 year rate to 5 years) with some prepayment options as well.

  28. Jonnathan says:

    How would someone obtain mortgage insurance on a 100% mortgage? I thought CMHC does not provide insurance on this type of product.

    1. Joe Q. says:

      There is probably some kind of alternative (expensive) insurance arrangement here, which accounts for the very high interest rate.

      In Canada, mortgage default rates are correlated with LTV. People with small down-payments are more likely to default on their mortgages than people with larger down-payments. I personally don’t have a big issue with 100% LTV mortgages as long as the lenders themselves bear all of the default risk.

    2. Nick Bachusky says:

      Typically CMHC would still only insure it at 95% LTV and the “downpayment” is still a loan or line of credit for the remaining 5% at the same 4.85% as the mortgage.

    3. @ Jonnathan

      This product isn’t being offered by the “Big Five” banks – just credit unions.

      I believe Meridian is the largest proponent of this product.

  29. Appraiser says:

    Myth: “Canadians are terrible with their money.”

    Correction: Some Canadians are terrible with money, regardless of interest rates. The smart ones are taking advantage of low rates to aggressively pay down debt.

    Facts: The most recent data indicates that over 40% of Canadian homeowners have no mortgage (RBC). Approximately 36% of current mortgagors are on track to have their home loans retired within 10 years (CIBC). Over 600,000 Canadians that are mortgage free, have a HELOC with zero balance. (CAAMP).

    1. frank le skank says:

      Stats are fun. Here’s an example from our American friends which illustrates how a seemingly low rate of foreclosure correlates to a percent decrease in prices.
      – More than 7 percent of Nevada housing units received at least one foreclosure notice in 2008
      – Nevada led the nation in price declines between March 2008 and March 2009, with Nevada prices falling 31.1 percent.

      It would be interesting to know if the 40% of Canadians who own their homes have money invested in other assets? Are they boomers who will sell to finance retirement? At first glance your stats are impressive, but if you dig deeper they provide an incomplete picture. Do RBC or CIBC hold all the mortgages in the country? I also find it funny when people use words like “facts” and “approximately” in the same sentence.

      1. Kyle says:

        Sorry but there is nothing “seemingly low” about Nevada’s 7% rate of foreclosure. As of Jan 2014 Canadian mortgages in arrears was at 0.55% (source below), the percent in actual foreclosure would be even less. So if you’re using Nevada as a measuring stick, things would have to get astronomically bad (an order of magnitude greater than 13x) here for house prices to drop an equivalent 31.1%

        http://www.cba.ca/contents/files/statistics/stat_mortgage_db050_en.pdf

      2. Appraiser says:

        I find it really funny when people are so pedantic and closed-minded that they try to parse every word to the nth degree. Would you like the stats illustrated to 17 decimal points?
        Oh yeah, and pulling irrelevant red-herrings out of your ass regarding foreclosures in Nevada was really impressive.

        The facts are cruel to those who don’t want to hear them.

  30. joel says:

    As Joe mentioned that this may be a great option for some and you mentioned that a line of credit may be a better option, I would have to say that saving money until you can afford it and not adding to the ridiculous market right now would be my suggested option.
    I am not generally a real estate bear in the Toronto market, but this year seems to have some ridiculous prices and having a 100% mortgage could be devastating to someone if the market slows or drops over the next couple of years, leaving them owing more than the house is worth after 5 years of paying down their mortgage at a high (relative to current prices) rate.
    If the market continues to grow by the rates it has over the last few years this could work out very well for someone that can’t afford to get into the market, but the potential downside is much higher than the potential upside.

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