Mortgages: No-money-down mortgages

The federal government officially closed the door on no-money-down mortgages Oct. 15, but exceptions remain that allow buyers to effectively finance 100 per cent of a home purchase.

Federal finance officials announced the changes in July, to take effect Oct. 15, banning 100-per-cent mortgages and loans with 40-year payouts. They called the move "a responsible and measured approach," to "reduce the risk of a U.S.-style housing bubble" in Canada.

Except Invis mortgage broker Paula Siemens counts three ways in which buyers can still get 100-per-cent financing or skirt the 100-per-cent rule by borrowing a down payment or taking so-called "cash back" mortgages.

The U.S. bank Wells Fargo offers 100-per-cent mortgages, Siemens said, and can do so through brokers because it self-insures those loans.

The maximum amount Canadian lenders can now advance on a mortgage is 95 per cent of a home's value to still qualify for mortgage insurance, which is guaranteed by the federal government.

However, Siemens said home buyers can borrow their down payment -- sometimes even on lines of credit or credit cards -- and their mortgage will comply with the new federal rules as long as the actual mortgage is no more than 95 per cent of the home's value.

David Gamble, director of public affairs for the federal department of finance, said in an e-mail exchange, that lenders have "flexibility in establishing their own standards on the source of a down payment."

However, on these mortgages, Canada Mortgage and Housing Corp., Genworth and AIG will not insure the borrowed down payment, only the 95-per-cent balance of the mortgage.

Then, Siemens said, there are the cash-back mortgages that offer the borrower anywhere from four per cent to seven per cent of the home's value as "cash back" on closing

Scotiabank bills its option as a "free down payment" mortgage for borrowers who haven't had a chance to save the minimum five per cent.

Spokespersons for the TD Bank (which offers a four-per-cent cash back mortgage) and RBC Financial Group (which gives five per cent to seven per cent back) both said the cash is supposed to be used for closing costs or furnishings and they specifically will not allow borrowers to use the cash-back as a down payment.

"In the interview process, it's very important to us to ensure those [down-payment] funds have come from your own resources and are not borrowed funds," Kevin Lutz, RBC's B.C. mortgage manager, said in an interview.

However, Siemens said it is not unheard of for a borrower to raise the five-per-cent down payment from family or friends, then use the cash back to repay the money.

And, as far as the federal finance department is concerned, if a cash-back program has the effect of leaving a loan-to-home-value of 95 per cent, "this would not be precluded under the new measures," according to Gamble.

Siemens added that the cash-back options do come with a price: a higher interest rate that will be one or two percentage points over the discounted rate borrowers can obtain for other mortgage products.

David Yuzpe, vice-president of Real Mortgage Associates, another national mortgage broker, said the zero-down options still available have never been a big part of his business. They are probably only suitable for young professionals who haven't had a chance to save for a down payment, but also have a very high credit score.

Yuzpe said there is a higher risk of borrowers walking away from 100-per-cent mortgages since they haven't put any of their own money into the loans.

Siemens guessed that the last time she arranged a cash-back mortgage was seven years ago.

"I don't think [cash-back] makes financial sense," she said. "I would probably find a way for a client to work with family members [to come up with a down payment], because the difference in interest rates "is going to be a significant cost to them."

(prepared by Derrick Penner/Vancouver Sun)