In the aftermath of the “Great Recession” when the U.S. housing market imploded, sending the global economy into a tailspin, Canada’s financial institutions were resoundingly praised for their stability and sound lending practices. Still, our country’s financial leaders recognized that there were some risks inherent in the system, and mortgage regulations were introduced to tighten any loopholes.
One notable series of changes, introduced by the Office of the Superintendant of Financial Institutions revolved around residential mortgages, including efforts to stop banks from offering “cash back” or “zero down payment” mortgages. As of 2008, buyers have been required to make a minimum 5 per cent down payment on their home purchase when taking out a mortgage with a federally-regulated lender.
But since credit unions are regulated provincially, they don’t fall under OSFI rules, and are able to offer many mortgage options that the banks increasingly can not, meaning the zero per cent down mortgage does, technically, still exist.
How “Zero Down” Mortgages Work
Zero down payment loans were created for people who could carry the cost of a mortgage, but simply didn’t have the resources to pull together the minimum down payment. (For anything less than a 20 per cent down payment, you’ll need to have mortgage default insurance, which protects the lender in case you default on your loan.)
With zero-down/cash-back mortgages, the financial institution lends the borrower anywhere from 1 to around 7 per cent of the mortgage amount upon closing. You can then use those funds for closing costs, or to pay for the down payment.
Vancouver-based Vancity credit union has a zero-down program for up to a $300,000 mortgage specifically targeting low-income families living in non-profit housing who are trying to get into the housing market. The application process includes mentoring and a financial literacy course, and the applicant’s total carrying costs (mortgage, property tax, and loan repayment) can not be more than 25 percent higher than their current rent.
Zero-Down Mortgages: Pros and Cons
Claire Drage, a senior mortgage expert with Mortgage Alliance, says that the “majority” of the credit unions she deals with, including Meridian, offer zero-down mortgages.
That said, “It’s not for everyone,” says Drage. “The ideal customer is someone young, just starting out, that hasn’t had the time to save for a down payment. But you pay a premium on the interest rate.” She’s currently able to find clients who have their down payment in hand a five-year fixed rate of 2.89 per cent. Clients who need a zero-down mortgage will pay anywhere from 4.7 percent to 4.85 per cent interest.
That 2 per cent swing has a significant impact on your mortgage payments. A $300,000 mortgage with a 25-year amortization at 2.89 per cent works out to a $645.14 bi-weekly payment. At 4.85 per cent, your payments will jump to $790.36 and you’ll end up paying nearly $28,000 more in interest over the first five-year term of the mortgage.
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To qualify for these loans, Drage adds, “credit history is extremely important.” Also, since credit unions are community focused, they typically only provide mortgages for homes located within a 30-minute drive of the branch.