Buying Property with No Down Payment
Several years ago before the credit crisis hit in the United States, you could buy property in Canada with no money down. After the crisis hit, Canadian lenders did away with this option in efforts to keep a firm grip on maintaining our strong banking system.
Now the minimum down payment required to purchase a principal residence in Canada is 5% of the purchase price. (The down payment requirement for rental properties is higher, ranging from 20-25% and up).
What you may not know is that some lenders are still offering a way for you to buy property with no down payment.
This is usually referred to as a ‘cash back’ program, and is for people who can afford the mortgage payments and just don’t have a down payment available, or for those people that do have a down payment and would like to use this money for renovating the property instead.
Now, the qualifying guidelines for this are tight, as you must have strong income and credit. (If desired, I can assess your income and credit in a complimentary consultation).
In addition, your mortgage interest rate is going to be higher than what the market is offering in order to minimize the lender’s risk.
Here’s how it works:
-The 5% down payment amount is worked into the higher interest rate, not into your new mortgage. So, if you purchase a property for $300,000 under this program, 5% of that would be $15K. The lender will charge you a higher interest rate to allot for them funding this down payment money for you, and your total new mortgage would be $285,000 ($300,000 purchase price – $15,000 down payment = $285,000).
Note that CMHC insurance fees will also be added on to the $285,000 mortgage, and are not included in this example to keep things simple.
-Your interest rate for the entire mortgage of $285,000 could be approximately 2% higher than market competitive rates, and it will be decided by the lender at the time of reviewing the file. Based on current fixed rates of 3.89% for a 5 year term for those with strong credit, the lender might give you a rate for this program of 5.89%. This means higher mortgage payments of approximately $400/month, depending on the amortization chosen and lender discretion.
-If you stay with the lender for the entire length of the 5 year term, you don’t have to pay back this 5% down payment money at all. If you refinance or sell before the 5 year term matures, you’ll be required to pay a pro-rated amount of this 5% ($15K in this example), in one lump sum, upon demand.
-If you decide to get the ‘cash back’ for renovations to your property, the lawyer will give you this money in the form of a cheque upon taking possession of the property. The down payment is again capitalized into the interest rate, which may be the same or higher than if it were just being used for down payment.
As always, rates and approval are determined by the lender and are different for each person’s situation.
>>On April 19th, some recently discussed changes to qualifying guidelines in the mortgage business will become final. Stay tuned for the next newsletter to see what these are.