You thought the zero down mortgage was gone. Eliminated. Didn’t the Department of Finance eliminate zero down mortgages in Canada along with forty year amortizations last October after observing how improper mortgage lending standards could lead to catastrophic consequences in the US?
They did. However many major financial institutions are still offering what are effectively zero down mortgages by offering a product called the cash back mortgage. Here’s how it works; the bank loans you up to 95% of the purchase price of the property (plus insurance premiums -- in Canada a mortgage must be insured when the down payment is less than 20% of the purchase price). In addition, they give the borrower 5% of the mortgage amount on closing to be applied towards the purchase of the property. To be exact, that amounts to 99.75% financing which is basically zero down. Assuming you’re buying a $300,000 property under this program, you’ll have to come up with a $750 down payment plus closing costs. Why does the lender give you 5% cash back? That seems rather generous. Simply, they plan to get the money back over the term of the mortgage by charging a higher than normal mortgage rate.
For example, in comparing the rates at one of Canada’s banks on April 29th 2009, the rate for a 5 –year fixed rate mortgage with a traditional 5% down payment was 3.95% vs 5.25% under the 5% cash-back program.
The cash back product isn’t given a lot of attention today and I think that’s because of the negative stigma attached to anything that seems like aggressive mortgage lending. The thing is, given the slowdown in our economy, we need to do what we can to get our economy moving. The Bank of Canada has put billions of dollars into our banking system to ensure that our lending markets remain fluid. The cash back mortgage is a great product for first time homebuyers who have stable income but who have not had a chance to save for a traditional down payment. It is nothing like a subprime mortgage because you must have a steady job with provable income and a good credit history.
