No down payment? No problem
By Jim Middlemiss • Bankrate.com

Canadians who find it hard to save the down payment normally needed to qualify for a mortgage don't have to worry any more, as Scotiabank recently launched a new product that will finance the entire purchase price. "It's about helping Canadians get into the housing market," says Alison Strimas, vice-president of mortgages at Scotiabank in Toronto. "We help them get into a home earlier where they start to build some equity."

Scotiabank's 100-percent mortgage is the latest mortgage product to hit the market as banks look to expand their market share and target people who might be able to afford the monthly payments of a mortgage but can't come up with a down payment.

Another emerging trend is a longer payoff or amortization period, which drives down monthly payments. But be forewarned -- while these new products can help you manage your current cash flow, you'll pay more interest in the long run.

Weighing the risks
So, is it wise to buy a home with no money down that will take a lifetime to pay off? Adrian Mastracci doesn't think so. A fee-only financial planner at KCM Wealth Management in Vancouver, he says such 100-percent financings are "a bad idea fraught with risk." He says it "pushes people a little further than they are comfortable going. You can borrow more and there's a propensity to get the bigger house."

Borrowing 100 percent means you essentially own a home that is worth less than what you paid once you factor in closing costs. So, if something goes wrong and you have to sell early, you will take a loss and likely owe the bank for the shortfall on the mortgage. If house prices decline, that only exacerbates the loss.

However, if house prices continue to increase -- traditionally home prices increase by about three  percent annually or the rate of inflation -- then the person who doesn't buy is left in the cold and must save even more to meet the traditional five  percent down payment requirement.

Meeting eligibility requirements
Strimas says criticisms of the 100-percent mortgage are overblown and must be weighed against the benefits of allowing Canadian to buy their first home sooner. For example, someone who wanted to buy a $300,000 home would normally require a $15,000 down payment, and Strimas says many people who could afford the monthly payments simply haven't been able to cobble together the down payment.

Moreover, she stresses, these mortgages still meet strict eligibility requirements. The bank applies the same "rigorous" standards assessing cash flow, credit history and ability to service debt. "These are extremely qualified buyers. We have no interest putting people into homes they cannot afford." She adds the mortgage is also flexible and allows buyers to pick from a range of payback options.

Doing the math
Any way you look at it, one thing is clear: people who use these new mortgage vehicles will pay more on a number of fronts.

First, the insurance premium for high-ratio mortgages increases a full point from the 2.75 percent you'd for a 95-percent-financed home to 3.75 percent. That means for a $300,000 home, you will need to borrow an additional $11,250 to cover insurance, which is $3,000 or 30 percent more than at 2.75.

Then there's the interest cost. If you add a longer amortization period, it gets very expensive, and that's what concerns Mastracci the most. If you take longer to pay off your mortgage, "it's pushing your retirement nest egg (farther up the road)."

He cites the example of a $100,000 mortgage at a six-percent interest rate. Pay it off over 35 years and your interest bill alone is $137,400. The total borrowing cost amounts to $237,400, more than double what you borrowed.

If you pay it off over the shorter period of 25 years, your payments are $640 a month, but the total interest paid is $91,400 for a total of $191,400. Over 20 years, the payment is $712 a month and interest is $70,900 for a total of $170,900.
 
However, if you amortize over 30 or 35 years, "you may as well be renting for 40 years," says Mastracci. "I'm not going to say nobody should have it," but if you are going to do it, pay it off as quickly as possible. Try doubling up payments or take advantage of prepayment options. "You have to come up with a game plan to pay that off."

Bank chief is cautious
An interesting side note: it's not just financial advisers and mortgage brokers who are wary of new mortgage products that forego down payments and feature extra-long amortizations -- Bank of Canada Governor David Dodge is, too. By making it easier for Canadians to obtain mortgages, he says this type of financing fuels inflation and keeps the housing bubble brewing.

Dodge expressed his concerns in a letter to the Canada Mortgage and Housing Corporation (CMHC), one of the country's three insurers that back high-risk mortgage loans. The others are Genworth Financial, which backs the new Scotiabank product, and newcomer American International Group Inc., which is expected to start rolling out its products any day now.

The Canadian Press reported on a letter exchange between Dodge and the CMHC in which Dodge expressed "dismay" at the CMHC's plan to offer interest-only loans for amortizations as long as 35 years. "Particularly disturbing," he wrote, was the rationale it would allow more Canadians to buy homes sooner. That, he says, will likely drive up home prices, making them less affordable and stoking inflation.

Jim Middlemiss is editor of Canadian Lawyer magazine and co-author of Your Guide to Canadian Law. He's a frequent contributor to the National Post and Investment Executive.