No Down Payment Mortgages
Last fall with Canada’s credit crunch the federal government did away with zero down payment mortgage and mortgage amortized over 40 years. The maximum amortization is now 35 years, but you can still purchase a home without a down payment thanks to CMHC’s Flex Down Program and a lender’s 5% cash back incentive.
How does this work? The lender advances the full purchase price of the home to the lawyer on the closing day providing you with the required 5% down payment and leaving you with a mortgage on 95% of the purchase price plus the CMHC premium.
Is there a catch? Yes, the lender charges you the posted interest rate, currently 5.85% and the CMHC is slightly higher. You will also have a portion of your cash back clawed back if you break the mortgage contract within 5 years. Is this a good deal for someone purchasing a home? I will provide you with some numbers and you can decide on your own.
A $300,000 home purchased with a 5% down payment and a 25 year amortization period would mean the total mortgage amount would be $292,837.50 consisting of $285,000 (purchase prices less down payment) and a CHMC premium of $7,837.50. At an interest rate of 4.39% payments would be $1602.92 and the balance after a five year term would be $256,630.31.
A $300,000 home purchased with a lender cash back incentive and the CHMC Flex Down Program and a 25 year amortization period would mean the total mortgage amount would be $293,265 consisting of $285,000 (purchase less 5% cash back incentive) and a CHMC premium of $8,265. At an interest rate of 5.85% payments would be $1850.26 and the balance at the end of a five year term would be $262,897.85.
The difference in payment is $247.34 a month so after the five year term the total payment difference is $14,840.62. This amount basically makes up the $15,000 cash back that was used for a down payment. The difference in the balance at the end of the five year term is $6,267.55. The total monetary difference is $6,108.16 over the five year term or $101.80 a month.
Should you purchase a home with a program like this? Only you can answer this question, but as you can see in the long run there is not much of a difference. If it will take you two years to save up $15,000 for a down payment and house prices increase 2% a year you will be better off buying now with a no down payment program.
I used this option (5% flex down payment) when I purchased my home over three years ago. The main difference is exactly as you described. You pay a higher rate of interest so that the cash is paid back. Also, there is a steeper penalty when trying to get out of the lending agreement (you have to come up with the remainder of the down payment).
I think in the end its kind of a wash as the value of my house has gone up at the same time. Similar homes have been sold, this year, for about 10% more than what I paid three years ago. The main thing to think about is. If you are going to save for a downpayment, you might as well go for the 20% down payment so that you may avoid paying the insurance premium. That is the main savings to be had. And, of course, it means you can usually afford “more” home.
Thanks for pointing this out to me back on my site, I wasn’t aware that no down payment was still possible. Even more shocking is that the numbers come in relatively OK!
Of course this increases the odds that your house might go down in value and leave your mortgage under water. Then again, you could say the same about 5% down compared to 20%.
It is interesting that the true interest rate of this program would be approximately 4.36% once you factor in the 5% down payment. Not great, but not bad.