As we reported a few weeks back, the Canadian government has decided to stop ensuring 0% down or 40 year mortgages through the CMHC. As a result, it seems that Canadians may just see more ‘Cashback Mortgage’ products come back onto the market.
This seems to be confirmed by a recent report in the Globe and Mail and our conversations with mortgage brokers. The Globe reported that:
- In essence, the products aren’t much different than a 100-per-cent mortgage loan
- The difference is that they allow buyers 95-per-cent financing through their mortgage, and the remaining 5 per cent down is paid by the bank in exchange for the borrower taking on a much higher rate. That’s usually the posted mortgage rate instead of the discounted rate available to most home buyers, which can mean a cost difference of 1.5 percentage points.
Using our mortgage calculator we can easily find that if we take a $350,000 mortgage amortized over 25 years and compare the best 5 year fixed rate with the same posted rate from a big bank, the monthly payment difference is:
5 year fixed discounted rate @ 5.24% = $2,083.70
5 year fixed TD posted rate @ 7.15% = $2,483.95
This results in a $400 monthly difference and almost $5,000 a year!
The article also stated that TD rebranded its No Down Payment Mortgage as the CashBack Down Payment Mortgage. The TD website says:
If a down payment is the only thing keeping you from taking advantage of today’s low mortgage interest rates, the CashBack Down Payment Mortgage could be just what you need.
TD Canada Trust can help you become a homeowner sooner. All you’ll require is enough money to pay for the closing costs. When you choose the 5-, 6-, 7- or 10-year fixed rate CashBack Down Payment Mortgage, your down payment is provided for you.
It’s a great way to get started.
TD also emailed mortgage brokers to tell them that the product’s terms and conditions hadn’t changed. Canada Mortgage and Housing Corp. (CMHC) has also said it will continue to offer a similar product, CMHC Flex Down. Most major lenders have some type of cash-back or “flexible” down payment mortgage option.
Is there much of a difference between cashback and 0% down mortgages?
It doesn’t seem to be much, if any, and a broker quoted in the Globe report seems to agree,
he plans to steer his clients clear of cash-back mortgages.
The monthly payments and interest costs are higher than those of traditional mortgages in the early years, meaning little financial flexibility for stretched buyers, he said.
“To me, this basically looks like no money down, but wearing a new suit”.
So it seems that Canadian mortgage shopper’s financing options may not be hugely affected by the October 15th, 2008 Canadian government rule change, however, its still a good idea to speak to a mortgage professional to ensure you’re getting the best mortgage available for your situation.