Debate on the ‘No Money Down’ Mortgage

No Money Down Mortgage CanEquity
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The option to own your own home with 100 per cent financing, or even more in some cases, seems like a great deal. There is no need to accumulate the standard minimum five per cent down because that too can be financed. If the rules on qualification are stringent, including proof of solid credit rating and significant income, why are some banking professionals claiming “dismay” at the rising issue of no money down mortgage products?

For starters, some feel that the increased availability of home ownership to a pool of buyers that have not saved to put down equity into their home purchase will contribute to bubbling housing issues and inflation.

Secondly, no money down means that the home owner will be in debt longer, and they will be paying more overall in interest payments. The purchaser will be paying interest on every dollar of the home’s value, as oppose to nicking off a good chunk, interest free, with the contribution of a sizable down payment. In addition, interest rates on a no money down mortgage tend to be one to two percentage points higher than rates available on other mortgage products that can be negotiated with a down payment.

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It can be argued that paying a premium on mortgage insurance to the Canada Mortgage and Housing Corporation (CMHC) is another additional cost to taking a no money down option, but this insurance is mandatory to anyone putting less than 20 per cent down. This applies to a much broader range of Canadian homeowners than solely those purchasing their property with no money down. If you want to bring this cost down, as well as future heating costs, then both CMHC and Genworth Financial Canada offer premium rebates and other perks to those that purchase energy efficient homes or make energy efficient renovations.

Traditionally, mortgage amortization periods came up to 25 years. Now, with products like the no money down mortgage, amortization can reach periods in excess of 35 years. Meaning, if a homeowner took the entire amortization life to pay down their mortgage, they could be paying and in debt for up to 40 years. If a homeowner opts for a interest-only option, which can be available for up to ten years, their home, in essence, means one decade of debt, with no build-up of equity.

So why have no money down mortgages increased in popularity? Why are more financial institutions offering them? This could potentially happen because in a housing market as volatile and oscillating as seen in some of Canada’s major cities and even hot spot town sites, the cost of the average home can be in excess of what the average Canadian can save even five per cent of. Does that mean they shouldn’t own their own home?

If your credit history is clear, and you know you will have no problems making the monthly payments dictated by the terms of a no money down mortgage, this option could still make the best financial sense to your circumstances. Often first-time homebuyers, or homebuyers still paying down student loans or other debts, cannot amass the savings needed to produce a down payment, but can still afford home ownership, and this is their avenue to get there.

Be aware that no money down doesn’t necessarily mean there will be absolutely no costs upfront; closing costs, including legal fees, appraisal fees, etc., can still apply. Some mortgage products may also loan you funding to cover these, but again, you will be paying interest on those funds.

Attaining a No Money Down Mortgage may break tradition, but often that is how progress is made. Do your homework and ascertain all the information and terms that are associated with the zero down options you are investigating. Know what the penalties are if you choose to break the term, or if extra payments are allowed in lump sums or in monthly pre-payments.

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