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by Tim Bennett
Every mortgage requires a down payment, it’s an unavoidable fact in Canada. But are there ways to get a no down payment mortgage? And further, is it a good idea to get a mortgage with no down payment?
This article has everything you need to know about no down payment mortgages. Here’s a quick warning though: It’s generally a bad idea to get a no down payment mortgage. If you’re thinking about one, it’s absolutely worth speaking to a licensed mortgage broker first.
Sort of. While the Canadian government outlawed zero down payment mortgages in 2008, it’s still possible to get a mortgage without a cash down payment by borrowing the minimum down payment*.
The only approach available today, called Flex Down, requires you to use your credit card, or another line of credit, to borrow your minimum down payment, typically 5% – 10%. As you might imagine, these loans are riskier and more expensive than traditional mortgages.
*Minimum down payments range from 5% to 20% depending on the purchase price.
There are lots of reasons why you might be looking to buy a home but not have a down payment saved. Of course, you could have just not made the effort to save one, but most people in that situation aren’t looking to get a zero down payment mortgage.
The more likely scenario is that you were totally ready to buy a home with a down payment saved, but something happened that depleted your savings in a hurry. A family emergency, a surprise pregnancy, or a global pandemic are all unfortunate but legitimate issues that could leave you looking for a mortgage with no down payment.
The short answer is no – it’s generally not a good idea to get a mortgage with no down payment. While it’s technically possible to get a zero down payment mortgage, it’s very hard to do – and that’s by design! Here are a few reasons why they can be a bad idea:
Lack of home equity: The first reason to avoid these mortgages is they will leave you in a lot of debt without a home equity buffer. Even a 5% down payment will leave you with a small amount of equity, which gives you some wiggle room if you needed to sell your home in a hurry.
Higher CMCH insurance premiums: A mortgage that uses borrowed money to make the minimum down payment also incurs higher mortgage default insurance premiums. Coverage is compulsory for all mortgages with less than a 20% down payment, but insurers like the CMHC** typically charge an extra .50% for premiums on a zero down payment mortgage.
Additional interest: Another drawback of a zero down payment mortgage is that you’ll have a lot more debt to pay interest on. If you borrow the 5% minimum down payment from a credit card, or another unsecured line of credit, you’ll be charged a high-interest rate on that amount. 5% of a typical mortgage, at a typical credit card interest rate of ~20%, could result in thousands of dollars of additional interest each year!
**Due to the ongoing COVID-19 pandemic, the CMHC is not currently issuing mortgage default insurance on mortgages with borrowed down payments. Other mortgage default insurance providers, however, are still doing so.
Still keen to get a mortgage with zero down payment? Here’s what’s you’ll need.
A Flex Down lender: Not all mortgage providers offer Flex Down mortgages, so you’ll need to find a lender that does. Most mortgage brokers will be able to help you find one.
A very good credit score: You’ll need a much better credit score than the average borrower to be approved for a no down payment mortgage – somewhere north of 680 is ideal.
Excellent credit history: In addition to your credit score, your prospective lender will want to see several years of perfect repayment history. That means no missed payments!
Sufficient and stable income: You will need to prove you have enough income to cover all of your payments, as well as a history of steady income. The longer you’ve been employed full time, the better your chances of getting approved.
Strong debt ratios: Your lender needs to be more than satisfied that you’ll be able to easily service your mortgage payments, as well as your other debts – including those associated with borrowing your down payment. Your debt ratios are used to calculate this.
A no down payment mortgage is not an ideal way to buy a home, and you should avoid them if you can. Taking more time to save a down payment, buying a cheaper home, or continuing to rent are all viable alternatives. There are significant costs and risks associated with zero down payment mortgages that you would do well to avoid.
If you’re still thinking about a no down payment mortgage, then be sure to book a free consultation with a licensed mortgage broker. They’ll be able to give you expert advice on your situation and help you find the best mortgage provider for you if you decide to go ahead.
If you need guidance with a mortgage and want to find out about your qualification, I can connect with you with industry leaders.
Current Surrey MLS® stats indicate an average house price of $850,366 and 1,477 new listings in the last 28 days. As of today, Surrey housing data shows median days on market is 22days.
Home buyers and sellers have gradually become more active in each month of the COVID-19 pandemic. In June, home sale and listing activity in Metro Vancouver* returned to more historically typical levels.
The Real Estate Board of Greater Vancouver (REBGV) reports that residential home sales in the region totalled 2,443 in June 2020, a 17.6 per cent increase from the 2,077 sales recorded in June 2019, and a 64.5 per cent increase from the 1,485 homes sold in May 2020.
Last month’s sales were 21.9 per cent below the 10-year June sales average.
“REALTORS® continue to optimize new technology tools and practices to help their clients meet their housing needs in a safe and responsible way,” Colette Gerber, REBGV Chair said “Over the last three months, home buyers and sellers have become more comfortable operating within the physical distancing and other safety protocols in place.”
There were 5,787 detached, attached and apartment properties newly listed for sale on the Multiple Listing Service® (MLS®) in Metro Vancouver in June 2020. This represents a 21.8 per cent increase compared to the 4,751 homes listed in June 2019 and a 57.1 per cent increase compared to May 2020 when 3,684 homes were listed.
The total number of homes currently listed for sale on the MLS® system in Metro Vancouver is 11,424, a 23.7 per cent decrease compared to June 2019 (14,968) and a 15.1 per cent increase compared to May 2020 (9,927).
“Much more of the real estate transaction is happening virtually today. Before considering an in-person showing, REALTORS® are helping potential buyers pre-screen homes more thoroughly by taking video tours, reviewing floorpans and an increased number of high-resolution images, as well as often driving through the neighbourhood.”
For all property types, the sales-to-active listings ratio for June 2020 is 21.4 per cent. By property type, the ratio is 19.9 per cent for detached homes, 25.2 per cent for townhomes, and 21.3 per cent for apartments.
Generally, analysts say downward pressure on home prices occurs when the ratio dips below 12 per cent for a sustained period, while home prices often experience upward pressure when it surpasses 20 per cent over several months.
“Home prices have remained steady with minimal fluctuation over the last few months,” Gerber said. “With increasing demand, REALTORS® have begun seeing multiple offers for homes priced competitively for today’s market.”
The MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $1,025,300. This represents a 3.5 per cent increase over June 2019 and a 0.3 per cent decrease compared to May 2020.
Sales of detached homes in June 2020 reached 866, a 16.1 per cent increase from the 746 detached sales recorded in June 2019. The benchmark price for a detached home is $1,464,200. This represents a 3.6 per cent increase from June 2019 and a 0.5 per cent increase compared to May 2020.
Sales of apartment homes reached 1,105 in June 2020, a 17.4 per cent increase compared to the 941 sales in June 2019. The benchmark price of an apartment property is $680,800. This represents a 3.6 per cent increase from June 2019 and a 0.8 per cent decrease compared to May 2020.
Attached home sales in June 2020 totalled 472, a 21 per cent increase compared to the 390 sales in June 2019. The benchmark price of an attached home is $790,800.
This represents a 2.3 per cent increase from June 2019 and a 0.2 per cent decrease compared to May 2020.
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C21 AAA Realty