Too Good To Be True?

A “no-down-payment” mortgage that actually lets you borrow more than the home’s value? To most of us, the idea of a mortgage that actually lets you borrow more than the value of your home sounds like one of the tall tales your uncle used to tell you when you were a kid.

Canadians are, after all, very practical and generally conservative and if it sounds too good to be true… it probably isn’t true. But our ideas about mortgages have been instilled by years of past experience with traditional products in traditional institutions.

Investment products have certainly come a long way since 1960. And so have mortgages. It is now possible – right here in Canada – to get a mortgage for more than the value of your home.

In addition to having funds set aside to cover closing costs, we’ve been conditioned to expect to lay down a minimum 5 or 10 per cent down-payment to get into the home ownership game. This was a well-recognized standard for many years. By law, a Canadian bank is not permitted to offer a mortgage for more than 75 per cent of the value of a home without mortgage insurance.

Even then, mortgage insurers do not go beyond 95 per cent. But while banks still provide a great many mortgage options to Canadians, they are now joined by other types of lending institutions. Not surprisingly, this is where some of the most innovative options, like no down-payment mortgages,
are being developed today.

It’s good news for prospective home buyers who have felt shut out of home ownership by the need to save for a down-payment. Renters with steady incomes but little savings can now start to put their monthly cheque towards building equity in an appreciating asset. With today’s lending rates
still low, and with house prices still strong, more and more Canadians don’t want to wait for home ownership. Many worry that they won’t be able
to find an affordable home by the time they’ve saved enough for a down-payment.

The hurdle of that first down-payment can also be particularly frustrating for young people who have begun to enjoy the good incomes that come with an education – but who have been paying off their school loans while they watch house prices climb higher and higher. Their future prospects are excellent, but their savings are non-existent.

A no down-payment mortgage can put them into a home right away. No down-payment mortgages were designed to help qualified individuals step quickly into home ownership. And while these mortgages come with a higher fee, this cost is covered by the additional mortgage amount. The newest mortgage even offers 3 per cent cash back.

The extra money could be used to purchase appliances and furniture, cover the expenses related to the move such as legal fees and land transfer costs, or for paying off other more expensive debt such as credit cards.

To be sure, these new mortgages are not for everyone. The objective is not to take on a higher debt load than you can comfortably bear. But for Canadians with good credit and steady incomes, these new mortgages can help to make the dream of home ownership a reality.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.