Here at Ratehub.ca, we have a number of first-time home buyers asking about zero down mortgages. So we decided to do a little bit of research and get some information on the topic. We also spoke to one of our mortgage brokers, Nelson Sousa of Axiom Mortgage Solutions, who has successfully closed several zero down mortgages so far this year. Here’s a summary of everything we learnt, in question and answer format.
How does a zero down mortgage work?
As you may know, the minimum down payment in Canada is 5%. However, one way for lenders to work around this is by getting you a cash back mortgage.
A cash back mortgage provides you with a percentage of your mortgage in upfront funds, which is possible because your house acts as collateral. However, the drawback is that your mortgage rate is higher (so interest costs over the term will be larger than the amount you receive in cash back).
Essentially, you can qualify for a 5-year cash back mortgage at 5%, where the 5% cash back is considered to be your down payment. However, on paper, the mortgage is structured as though you put in 5% of your own funds. Of course, remember that you will have to pay CMHC insurance associated with this mortgage (you incur this cost for down payments less than 20% in Canada.)
Potentially, with a 10 year term, you may be able to procure an 8% cash back mortgage rate. So in theory, you could have 103% financing on your mortgage if you put in a 5% down payment. However, it is important to do some cost-benefit analysis and determine whether it is worth taking on.
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Who is most likely to qualify for a zero down payment mortgage?
Because lenders are taking on higher risk with such a mortgage, they are looking for clients with absolutely no credit violations in the last year. Additionally, you should have at least two trade lines such as credit cards or car loans with perfect two year histories.
Your credit history is the determining factor in acquiring a zero down mortgage, also known as an interest only home loan. Following that, the lender will consider your education as well as job tenure. They want to see that you’ve been steadily employed as opposed to switching jobs every couple of months.
When does a zero down mortgage make sense?
Because of the higher interest rates, the funds you receive from a cash back mortgage do not compensate for the amount you will pay in interest over the length of the term. That being said, it is a good option for people who do not have enough funds to cover the down payment at that time and who want to take advantage of a good buyers market or low mortgage rates. If you’re sure of a property and don’t want to let the opportunity slip by, this type of mortgage is something to consider.
Another scenario where this product makes sense is if you want a little extra cash for closing costs or, say, to purchase furniture for your new home.
You could also consider putting in a small down payment of your own, perhaps 1% or 2% of the asking price and making up the difference with the funds from a cash back mortgage.
How do I get a zero down mortgage?
Get in touch with a mortgage broker in Canada who can help you navigate this tricky mortgage product. A mortgage broker must have good relationships with the banks and lenders that they work with. Because of the risk involved, it can be difficult to procure 100% financing for a property, but it’s not impossible.
When will I get my cash back?
You can get your cash back funds within a few days of closing, if not on the actual day, depending on how quickly your lawyer can process the paperwork from the lender.
To conclude, there are a few reasons to pursue a mortgage with no down payment. However, to qualify you need to have excellent credit history and demonstrate that you’re a solid client to take on. Lenders who take on these zero down payments mortgages are big lending institutions, as opposed to a trust company or financial group. Keep in mind that with such a mortgage, you will be making up for the added risk with a higher interest rate. So, your gain initially is recouped in interest payments by the lender later on.