The historically low interest rates we've seen the
past couple of years have been a boon to borrowers, resulting in
a record number of house purchases across Canada.
Hoping to cajole even more people into the housing
market, banks and other lending institutions have started peddling
an innovative and unprecedented product: the no-money-down mortgage.
Also known as a cash-back mortgage, this product enables
you to buy a home without having to make a down payment. Here's
how it works.
Great opportunity for long-time
If you're a first-time home buyer, chances are you can't afford
an exceptionally large down payment. Consumers that can't scare
up more than 25 percent of the sum of their mortgage must get mortgage
insurance, available through the Canada Mortgage and Housing Corporation
(CMHC) or GE Capital Mortgage Insurance Company (GEMICO). It's done
in order to protect lenders should you unexpectedly default on your
Both CMHC and GEMICO stipulate, however, that they
won't insure more than 95 percent of a mortgage, which is why home
buyers have traditionally had to come up with at least five percent
as a down payment.
Even that amount can be an insurmountable obstacle
for long-time renters with little savings, which has prompted many
banks to intervene, offering to dole out the residual five percent
of a home's value.
It isn't lending, but granting, like a gift. The idea
is to give you the money up front so you can make the minimum down
payment to appease the mortgage insurers. That's why it's sometimes
called a cash-back mortgage. The first Canadian institution to offer
it was Scotiabank, which introduced this service in April 2003.
A good deal for you, but a better
one for the banks
While banks like to portray the launch of no-money-down mortgages
as a humanitarian endeavour, these five-percent gifts aren't exactly
charitable donations. By getting you into the market sooner, they
also draft you into the mortgage cycle sooner.
On a house priced $300,000, for example, the bank
will give you $15,000 up front, and then sign you up for the remaining
$285,000. If you calculate the interest on that sum, it will make
the bankers oodles of cash and allow them to recoup their initial
"gift" many times over.
Motives aside, the no-money-down mortgage can be a
blessing for first-time buyers anxious to get out of the renting
"The nice thing about this five percent is not
only do you not have to pay it back, but you are a little bit ahead,
because you put five percent into the property," says Gillian
Riley, vice-president, mortgages, at Scotiabank. "You're not
sitting there, a year or two later, with no equity in the property."
This financial scheme puts reduced pressure on home
buyers up front. Even so, most banks say you should be able to come
up with 1.5 percent of the purchase price of the home for the sundry
closing costs -- lawyer's fees, title searches, moving expenses,
This type of mortgage also comes with competitive
terms and rates, so taking advantage of a no-money-down mortgage
doesn't necessarily mean you'll miss out on good rates offered to
those with bigger down payments. To check on current rates, click
High insurance premiums a concern
Something else to bear in mind: the smaller your down payment, the
greater your insurance premiums. If you put down 25 percent of your
mortgage (i.e., you're being insured for 75 percent), CMHC or GEMICO's
premiums are 0.65 percent of the mortgage.
The insurance rates rise at 75, 80, 85, 90 and 95
percent -- so, if you opt for a no-money-down mortgage (i.e., you're
insured for 95 percent), the premiums are 3.25 percent. That means
$9,262.50 in insurance alone on a $285,000 mortgage.
To qualify for a no-money down mortgage, you have
to demonstrate a history of settling your debts and show that your
earnings are sufficient to meet the monthly mortgage payments.
There's no rule stating that self-employed individuals
can't take advantage of a no-money-down mortgage, but given the
size of the loan, preference is given to applicants who can show
a history of regular pay stubs.
Excellent credit is essential
A no-money-down mortgage might allow you to enter the market sooner,
but it won't allow you to buy beyond your means. If you and your
partner have combined annual earnings of $80,000 and little in savings,
a $500,000 home will probably be a pipe dream whether you can make
a down payment or not.
"There is no ceiling on the actual price of the
home that you buy, but you still have to meet all of the credit
requirements," says Grace Thrasher, communications manager
at CMHC. "In the case of these new options [like no-money-down
mortgages], lenders are more stringent than they would be if you
were making a normal down payment, with your own cash, for 95 percent.
You do have to prove that you've been able to meet
your debt requirements, and demonstrate that you have a good credit
The handy thing about the no-money-down mortgage is
that you can take advantage of it even if you can afford the minimum
down payment. Banks don't mind -- after all, their only concern
is signing you up for a nice, long mortgage term.
Says Riley, "If [buyers] already have the five
percent and they want [the cash-back mortgage], they could use that
five percent for renovations or to buy furniture or on the closing
costs, so they're not completely squeezed."
Andre Mayer is a freelance writer