100% Home Financing Allowed

Tuesday, February 24th, 2004

New rules let buyer use credit card or bank loan as a downpayment

Wyng Chow

Home buyers will be able to effectively obtain 100-per-cent financing to purchase a property under a new initiative announced Monday by Canada Mortgage and Housing Corp.

Up to now, borrowers have been required to come up with a minimum downpayment of five per cent of a purchase price from their own resources, in order to qualify for mortgage insurance.

Effective March 1, CMHC is dropping that requirement, allowing the five-per-cent downpayment to originate from any source, including credit card, personal bank loans, other lender incentives, or borrowing from relatives.

“The change will enable many Canadians to realize their home ownership dream sooner than what would otherwise be possible,” said Wayne Proctor, CMHC’s director of business development.

Borrowers would still need to prove their ability to meet their debt requirements before the federal agency will guarantee the mortgage for 95 per cent of the property purchase price.

Young first-time home buyers are expected to benefit most from CMHC’s new guidelines.

“I think this move will be very helpful,” said Jessica Jang, a 20-year-old Vancouver office administrator, who has been frantically saving to purchase her own condo.

“A lot of people my age can’t afford to buy their own place. But if you can now borrow money from parents, or friends, and pay them back on your own time, it will really help.”

CMHC’s new policy was also applauded by Gord Dahlen, vice-president, Western Canada, for Invis Financial, a leading mortgage brokerage firm.

“We’re very excited about it,” he said in an interview. “This is going to give a real shot in the arm to both the housing industry and the mortgage industry.

“It will particularly help those young people, professional or otherwise, who have steady employment but haven’t yet been able to raise the five-per-cent downpayment to get into home ownership quicker.

“It’s very good news. It demonstrates that CMHC has done its homework and understands the marketplace.”

Dahlen said a person’s ability to pay should be regarded as “more important than having five-per-cent down.”

Under CMHC’s old rule, first-time buyers could not qualify for mortgage insurance if they borrowed the minimum downpayment. If the money came from parents or other family members, they had to declare it as a non-repayable “gift.”

With the change, purchasers will be allowed to take advantage of wide-ranging means of financing, while lenders will be able to offer Canadians a variety of mortgage products, including terms as low as six months and fixed, adjustable and capped interest rate loans.

Using a $200,000 property as an example, a buyer would still have to qualify for a mortgage representing 95 per cent of the purchase price, plus an insurance premium of 3.25 per cent of the loan if the downpayment is less than 10 per cent.

Based on the best five-year fixed rate currently available of 4.4 per cent, the monthly payment on the $196,175 loan, with a 25-year amortization, would be $1,075.

If the buyer doesn’t have any of the minimum five-per-cent downpayment and had to borrow, a typical consumer loan of $10,000 at an interest rate of 7.25 per cent (prime plus three) would cost $199 a month over five years.

At credit-card interest of 18 per cent, the monthly payment on $10,000 over that period would be $254.

However, Invis mortgage consultant Rick Robertson pointed out that virtually every major bank is currently offering a “five-per-cent cash back” plan if borrowers take out a fixed mortgage for a five-year term at the posted interest rate of 5.8 per cent.

At 5.8 per cent, the $196,175 loan would cost $1,232 monthly, or $157 more than the loan at the 4.4 per cent rate, a difference of $9,421 over 60 months.

But a five-per-cent cashback payment amounts to $9,808, or $387 more in the consumer’s pocket.

“A borrower would then only have to come up with a couple of hundred dollars of the $10,000 downpayment,” Robertson said.

© The Vancouver Sun 2004


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