As a Mortgage Broker one of the most common questions I get asked is: what is the difference between Zero ($0 or 0%) down mortgage and a standard mortgage of 5% down or more.
In the past home buyers had an option of getting a 100% mortgages but that is no longer available in Canada. The alternative option for people who do not have a down payment is called a cash back mortgage which allows you to purchase a home with less than 5% down and can go all the way to 0% down. With a cash back mortgage the lender will give you up to 5.5% of the mortgage amount back at closing and these funds can be used for the down payment on the property. The cash back mortgage is only available on a 5 year fixed interest term and the interest rate is typically set at the 5 year posted rate.
This is a great product for someone that has good credit but has been unable to save for a down payment. In addition to leveraging the cash back option for the full 5% down there are some other options that can help people who have some of the money but not the full amount needed.
We work with a number of great Lenders and Financial Institutions that offer between 1% and 3% cash back for customers that have a portion of the down payment but not all of it. The interest rates for this product is considerably lower than the 5.5% cash back product.
The current rates for cash back mortgages are as follows:
0% Down Payment (5.5% cash back) 5.24%
2% Down Payment (3% cash back) 4.24%
3% Down Payment (2% cash back) 3.94%
4% Down Payment (1% cash back) 3.64%
5% Down Payment (0% cash back) 3.24%
**The above rates are as of April 1, 2012 and are subject to change without notice**
While at first glance you may look at these rates and say wow that is high but what does that actually mean? How much extra would I be paying over the 5 years to get with any of the options for with less than a 5% down payment?
Using purchase price of $400,000.00 here is the actual cost of taking a 5.5% cash back mortgage on a 5 year term with a 25 year amortization.
Payment on 5.5% cash back $2324.51
Payment if you had 5% down payment $1896.10
Difference of $ 428.41 X 60 months = $25,704.60
5.5% of $380,000.00 $20,900.00
Cost of receiving the 5.5% cash back $4,804.60
If you were to get a personal loan from a bank for that same amount of $20,900.00 your monthly payment would be approximately $427.00 and the total interest paid over the 5 years would be about $4750.00. As you can see even though the interest rate seems to be higher the costs for you to borrow the funds are the same. The numbers for the 1% to 3% cash back products work out very similar.
To sum up, if you do not have the full down payment of 5% you can take advantage of these products and buy that new house without having to wait to save up the down payment. At the end of the 5 year term you can then refinance at the discounted rates available at the time of the refinance.
One thing to keep in mind is that if you refinance or sell the property before the term is complete you may have to pay some or all of the “cash back” depending on how long the mortgage is in place. The cash back is not a gift to you it is essentially a loan that is built into the mortgage and is paid back over a 5 year period.
If you would like to arrange a complimentary consultation with us to explore your mortgage options please visit our Calgary Mortgage website and fill out the 30 second Quick Application form or you can call us at 403-265-5363. We are committed to making sure that every client gets the best mortgage rates and the best terms – guaranteed. There are no fees or costs for you to use our services and we are available to meet on your schedule.
Have a great week and very happy Easter holiday!
Larry Arnason, Your Calgary Mortgage Broker