A few years ago, there was a lot of buzz about “zero-down” mortgages – and the idea of buying a home without any downpayment was a pretty attractive prospect for Canadian homebuyers. Then the economic crisis struck the housing industry in the U.S., and many wondered if zero-down mortgages were financially reckless. The answer, as ever, is both yes and no.
A zero-down mortgage is not for everyone – but for qualified homebuyers, a well-designed zero-down plan can be a tremendous financial boost: getting Canadians into their homes faster, saving potentially thousands in rent, and giving homebuyers a jump start on building wealth.
What about the worry that the Canadian housing industry is following the same catastrophic path as in the U.S.? Well, let’s take a clear-eyed look at why the Canadian and U.S. situations are very different. The ability of our American neighbours to tax-deduct the interest on their mortgage created millions of heavily-leveraged homeowners. And their previously lax lending rules on subprime and adjustable rate mortgages coaxed many U.S. homebuyers into homes that were affordable for only the first few years, which ultimately led to the U.S. housing crisis.
The problem mortgage products were never available in Canada. Additionally, the Canadian government has tightened mortgage rules three times in less than three years, while lenders have become increasingly cautious. Canadians also remain prudent with their financial management; according to Canadian banking industry figures, the percentage of mortgages in arrears currently sits at a mere .38 of one percent. That combination – regulation, conservative lending and consumer attitude – have played a big role in protecting the Canadian housing market.
Today, buying a home with zero downpayment for the right candidate can still be a financial breakthrough, and the beginning of a successful wealth journey. If you have stable income, good credit, and the ability to comfortably manage your monthly mortgage payment and ongoing housing expenses, then you could be a candidate for a zero-down mortgage. Consider that the money currently going to rent could be helping you build home equity right now. And that we are in a time-limited window of opportunity of historically low mortgage rates – meaning you could lock in a great payment plan for five or even ten years instead of waiting and saving… only to find that rising interest rates are putting your dreams of home ownership out of reach.
So how can you get around saving that critical 5% downpayment: the minimum required to qualify for an insured mortgage? We can review your options, which include:
- Borrowing the downpayment through a loan or unsecured line of credit;
- Securing a “cash-back” mortgage that provides the cash upfront; or
- Having the downpayment gifted to you by a parent or other blood relative with a letter saying you are not required to pay the money back at any time.
We can outline all of the details that you should be aware of with each option. For instance, cash back mortgages have higher interest rates and if you pay out your mortgage before your term is up, you’ll be required to pay back a pro-rated amount of the downpayment you received. If you borrow the downpayment, the loan payment will be used in your qualifying calculation. And you’ll need to have funds set aside to cover your closing costs.
Want to learn how to build your downpayment faster, how to purchase now without waiting, or how to build your credit rating to qualify for a great rate when the time comes? If you’re in the “saving up” stage of preparing for homeownership, this is a great time to come in for advice. Let’s talk!
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