The ‘No Down Payment’ Mortgage

Your Mortgage Matters by Vancouver Mortgage Broker Rebecca Awram

Click Here For More Info on BC Down Payment Loan Program

Contrary to popular belief, a home purchase with no down payment is still possible! Also known as ‘zero down’, ‘zero down payment’ and ‘gifted down payments’, very few lenders have this option available. This is understandable, considering that they carry all the risk when the buyer has absolutely nothing invested in the property. In fact, it was the wide availability of “no money down” mortgages in the US, among other things, that led to their widespread housing market crash. The Canadian counter-part is considerably more restrictive.

All mortgages in Canada in which the purchaser has a down payment of less than 20% and wants best-market-rates, must be insured. The parameters of this insurance are dictated by the federal government. One of the changes they made several years ago was that they would not insure mortgages without a minimum down payment of 5%. So, a few lenders in Canada got creative and devised a product that essentially “gifts” the purchaser the required 5% down payment.

It is structured as a 5% cash-back mortgage, and carries an average interest rate of about one and a half percent higher than best market rates. The ‘down payment’ is actually gifted and not repayable, hence the higher interest rate to compensate for that. The applicant must have excellent credit, steady employment and be able to show liquid cash available of 1.5% of the purchase price for closing costs. Underwriters on this mortgage are quite picky, and they should be. They can also afford to be, as they have very little competition on this product.

This product is not the best choice for everyone. The gifted down payment mortgage is particularly well-suited to individuals that are already making a rent payment that is equal to or higher than a mortgage payment and would transition easily. My personal advice is that if applicants believe that they could save a 5% down payment within a year to 18 months, then they should wait and get the lower interest rate. However, if it is going to take so long to save the down payment that interest rates might go up by one and one half percent by then anyway, it makes sense to move forward NOW and to take the free money!

One of the important features of the Gifted Down Payment Mortgage is that it comes with a five year term and there are heavy penalties for breaking the term early. The lender only recoups the “gifted” money if the borrower pays the stated interest rate for the five year term. So, if the borrower needs to break the contract early, then they owe a proportional segment of the “gift” back to the lender. For example, breaking the five year term at the end of year 4 would necessitate paying back 20% of the gifted down payment. Or, at exactly 2 ½ years, the penalty would be exactly half of the gifted down payment. This is in addition to any other standard pre-payment penalties that apply on all fixed term mortgages.

For individuals without a down payment, there ARE other options available. Having a family member(s) ‘gift’ the 5% to you is the easiest, and gives you instant access to best-market-rates. Also, if your debt is low, there is also the option of borrowing money for an RRSP and then 3 months later withdrawing it under the government Home Buyer Program without paying tax on it, as long as it is for a down payment. This is only well suited to those individuals that have very little debt, as adding the monthly payment on the RRSP loan can often make your debt load to high to qualify for the mortgage payment.

Everyone’s situation is different. Contact me anytime to find out what is the best option for you.

More About Rebecca Awram BA

Rebecca joins the team with over 20 years of business, investment and real estate experience. A true advocate for the consumer, Rebecca is a mortgage broker who brings you unparalleled integrity with unbiased advice. Phone anytime and discover for yourself just how easy and enjoyable the mortgage process can be.

Serving Metro Vancouver Area
including Maple Ridge & Pitt Meadows BC

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